Inflation
       rate
(percent
per year)

Unemployment rate
                (percent)

      Price 
      level
      (GDP 
deflator)

Real GDP

Y

100

Y_0

SRAS

AD

Using Aggregate Demand and Aggregate Supply
                  to Explain the Phillips Curve

    Initially, the economy is at a price level of 
100 and real GDP of Y_0.
    Slide the AD slider to realize an increase 
in AD. In panel (a), observe how the price 
level and the real GDP are changed. In panel 
(b), observe how the inflation rate and the 
unemployment rate are changed when point 
B moves along the Phillips curve.
    When there is only a weak increase in AD,
the price level increases less than if there is
a strong increase in AD, and the economy 
will experience a lower inflation rate and a 
higher unemployment rate, as predicted by 
the Phillips curve.

(a) Basic AD-AS Model

(b) The Phillips Curve

    (For simplicity, we assume that the SRAS 
curve does not shift and that the Phillips curve 
is linear.)

v = Vector((0, 0), (0, 11))
L_1 = (5, 0)
L_2 = (5, 10)
AD = 5 (slider from 1 to 5, step 0.1)
u = Vector((0, 0), (11, 0))
w = Vector((-14, 0), (-3, 0))
a = Vector((-14, 0), (-14, 11))
f(x) = If[-13 ≤ x ≤ -3, (0.5 * x) + 10.75]
g(x) = If[-13 ≤ x ≤ -3, ((-0.5) * x) + AD - 0.75]
A = Intersect(f, g, (-6.5, 7.5))
Y_A: ((-14), y(A))
d = Segment(Y_A, A)
text7: "" + (AD + 100) + ""
X_A: (x(A), 0)
e = Segment(A, X_A)
B: (((-0.5) * AD) + 7.5, AD)
X_B: (x(B), 0)
Y_B: (0, y(B))
b = Segment(Y_B, B)
c = Segment(B, X_B)
text3: "" + AD + "%"
text4: "" + (((-0.5) * AD) + 7) + "%"
C = Point(f)
Y_C: ((-14), y(C))
X_C: (x(C), 0)
i = Segment(Y_C, C)
j = Segment(C, X_C)
T_1 = Point(g)