📉 The Phillips Curve
The trade-off: The Phillips curve.
Short-run Phillips curve (SRPC)
Shows the trade-off: expansionary policy reduces unemployment but raises inflation. Contractionary policy reduces inflation but raises unemployment. Policymakers face a choice.
Long-run Phillips curve (LRPC)
The monetarist/new classical view: in the long run, the Phillips curve is vertical at the natural rate of unemployment. You can't permanently reduce unemployment below the NRU — you just get higher inflation. Only structural reforms can shift the LRPC.
Draw the SRPC as a downward-sloping curve and the LRPC as a vertical line at the NRU. Show how expansionary policy moves the economy along the SRPC (lower unemployment, higher inflation) but in the long run it returns to the NRU at a higher inflation rate.
âš¡ Key Conflicts Between Objectives
Pursuing one macroeconomic objective often comes at the expense of another:
- Growth vs inflation — rapid growth can overheat the economy, causing demand-pull inflation.
- Growth vs environment — higher output often means more pollution, resource depletion, and carbon emissions.
- Low unemployment vs low inflation — the Phillips curve trade-off (at least in the short run).
- Growth vs external balance — as incomes rise, people import more → trade deficit may widen.
- Equity vs efficiency — redistributive policies (taxes, transfers) can reduce work incentives.
The holy grail: Governments aim for sustained, non-inflationary growth with low unemployment and external balance. But achieving all four simultaneously is extremely difficult — trade-offs are inevitable, especially in the short run.
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🔧 Resolving Conflicts
- Supply-side policies can reduce the Phillips curve trade-off — shift LRAS right → more output WITHOUT more inflation → achieves growth AND low inflation.
- Green growth strategies — investment in renewable energy, carbon pricing → growth compatible with environmental goals.
- Policy mix — use monetary policy for inflation control + fiscal policy for employment + supply-side for long-run growth.
- Prioritisation — governments may accept short-term trade-offs (e.g. tolerate temporary inflation to reduce a recession).
In the IB exam, never claim a policy has no drawbacks. Always acknowledge the trade-off and evaluate whether the benefits outweigh the costs in context.
A strong conclusion links back to the specific context: What type of economy? What phase of the business cycle? What's the most pressing problem? This earns top marks.