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The Phillips Curve: Unemployment vs. Inflation

Stagflation, the Expectations-Augmented Curve, and Why the Original Broke Down — A TLDR Primer

If the Phillips Curve showed up on your AP Macroeconomics exam tomorrow, could you explain why it slopes downward, why it fell apart in the 1970s, and what the long-run vertical version actually means? If not, this guide is for you.

The Phillips Curve is one of the most tested and most misunderstood concepts in introductory economics. Students see the graph, memorize "unemployment and inflation move in opposite directions," and then freeze when a question asks about stagflation, inflation expectations, or why the Federal Reserve cares so much about the natural rate of unemployment. This primer closes that gap.

**TLDR: The Phillips Curve** walks you through the original empirical observation by A.W. Phillips, the demand-side mechanism that makes the short-run tradeoff real, and the dramatic breakdown of the simple curve during the stagflation of the 1970s. It then builds up the expectations-augmented version developed by Milton Friedman and Edmund Phelps — the framework that still anchors macroeconomic policy today. The final section connects everything to modern Federal Reserve decisions and the post-pandemic inflation surge, so the theory never feels disconnected from the real world.

This is a focused, 15-page primer written for high school and early college students. No filler, no detours — just the core ideas, worked explanations, and the conceptual clarity you need for class, an ap macroeconomics study guide session, or a last-minute exam review.

Pick it up, read it in one sitting, and walk into your exam with the unemployment-inflation tradeoff locked in.

What you'll learn
  • Explain the original Phillips Curve relationship between unemployment and inflation
  • Distinguish the short-run Phillips Curve from the long-run Phillips Curve
  • Define the natural rate of unemployment and explain why the long-run curve is vertical
  • Use expectations-augmented thinking to analyze stagflation and supply shocks
  • Connect the Phillips Curve to real Federal Reserve policy decisions
What's inside
  1. 1. What the Phillips Curve Claims
    Introduces the original empirical observation by A.W. Phillips and the basic intuition behind the inverse relationship between unemployment and inflation.
  2. 2. Why the Tradeoff Exists in the Short Run
    Explains the economic mechanism — tight labor markets push wages and prices up, slack labor markets pull them down — using aggregate demand shifts.
  3. 3. Stagflation and the Breakdown of the Original Curve
    Covers the 1970s, when high inflation and high unemployment occurred together, shattering the simple Phillips Curve and forcing a rethink.
  4. 4. The Expectations-Augmented Phillips Curve
    Introduces Friedman and Phelps's critique, the role of inflation expectations, and the natural rate of unemployment as the anchor of the long-run curve.
  5. 5. Short-Run vs. Long-Run Phillips Curve
    Shows graphically how the short-run curve shifts when expectations change, while the long-run curve is vertical at the natural rate.
  6. 6. Why It Still Matters: The Fed, Modern Policy, and Recent Debates
    Connects the framework to Federal Reserve decisions, the post-2008 'flattening' debate, and the post-pandemic inflation surge.
Published by Solid State Press
The Phillips Curve: Unemployment vs. Inflation cover
TLDR STUDY GUIDES

The Phillips Curve: Unemployment vs. Inflation

Stagflation, the Expectations-Augmented Curve, and Why the Original Broke Down — A TLDR Primer
Solid State Press

The Phillips Curve: Unemployment vs. Inflation

Stagflation, the Expectations-Augmented Curve, and Why the Original Broke Down — A TLDR Primer

Copyright © 2026 Solid State Press.

Published by Solid State Press.

All rights reserved. No part of this book may be reproduced or transmitted in any form without prior written permission, except for brief quotations in critical reviews and educational use.

Part of the TLDR Study Guides series.

Contents

  1. 1 What the Phillips Curve Claims
  2. 2 Why the Tradeoff Exists in the Short Run
  3. 3 Stagflation and the Breakdown of the Original Curve
  4. 4 The Expectations-Augmented Phillips Curve
  5. 5 Short-Run vs. Long-Run Phillips Curve
  6. 6 Why It Still Matters: The Fed, Modern Policy, and Recent Debates
Chapter 1

What the Phillips Curve Claims

In 1958, a New Zealand economist named A.W. Phillips published a paper in the journal Economica that would reshape how governments and central banks thought about managing their economies. Phillips had done something deceptively simple: he dug through nearly a century of British wage and unemployment data — from 1861 to 1957 — and plotted the two variables against each other. What he found looked like a clean, stable curve sloping downward from left to right. When unemployment (the percentage of the labor force actively looking for work but unable to find it) was low, wage growth (the rate at which workers' pay was rising) tended to be high. When unemployment was high, wage growth was low — sometimes even negative.

That curve became known as the Phillips Curve.

Later economists, including Paul Samuelson and Robert Solow, extended Phillips's insight from wages to prices more broadly. Because wages are the dominant cost for most businesses, rising wages eventually push up the prices of goods and services. So the Phillips Curve was reframed as a relationship between unemployment and inflation — the overall rate at which prices in an economy are rising, usually measured as the percentage change in a price index like the Consumer Price Index (CPI) over a year.

The claim at the heart of the Phillips Curve is an inverse relationship: as one variable rises, the other falls. Formally:

$\pi = f(u), \quad \frac{d\pi}{du} < 0$

Don't let that intimidate you. It just says inflation $\pi$ is a function of unemployment $u$, and the relationship runs in opposite directions — higher unemployment, lower inflation; lower unemployment, higher inflation.

The intuition behind the curve

Think about what a hot job market feels like. When unemployment is low, companies are competing hard for a limited pool of workers. Employees have leverage: they can demand higher wages, and employers tend to grant them rather than lose talent. Those higher labor costs get passed along — at least partially — to consumers in the form of higher prices. Meanwhile, employed workers with rising paychecks spend more, which pushes demand for goods and services even higher, giving firms additional cover to raise prices. Inflation climbs.

About This Book

If you are studying for the AP Macroeconomics exam, enrolled in an introductory college economics course, or working through macroeconomics concepts for a high school review session, this book was written for you. It also works for tutors preparing a lesson and parents who want to understand what their student is actually studying.

This guide delivers the Phillips Curve explained for students in plain, direct terms — covering the unemployment-inflation tradeoff that sits at the center of macroeconomic policy, what caused the stagflation of the 1970s to shatter the original model, how the natural rate of unemployment can be explained simply through the expectations-augmented framework, and how the Federal Reserve uses inflation policy today. A concise overview with no filler.

Read it straight through once to build the full picture. Work through the solved examples as you go, then attempt the problem set at the end to confirm you can actually use what you have read.

Keep reading

You've read the first half of Chapter 1. The complete book covers 6 chapters in roughly fifteen pages — readable in one sitting.

Coming soon to Amazon