Inflation
       rate
(percent
per year)

Unemployment rate
                (percent)

Long-run 
Phillips 
Curve

C_1

1

2

3

4

5

6

7

8

9%

1        2         3        4        5         6        7        8%

    (We assume that in the long run, the unemployment 
rate always returns to the natural rate of unemployment. 
In other words, the long-run Phillips curve is vertical 
and does not shifts.)

       Shifts in the Short-Run Phillips Curve
When the Inflation Rate is Lower than Expected

π_0 = 5%

C_2

v = Vector((0, 0), (0, 11))
L_1 = (5, 0)
L_2 = (5, 10)
a_1 = Segment(L_2, L_1)
π_1 = 2.5 (slider from 1.5 to 5, step 0.1)
S_1: ((0.5 * π_1), 10)
S_2: (5 + (0.5 * π_1), 0)
u = Vector((0, 0), (11, 0))
b = Segment(S_1, S_2)
C = Intersect(a_1, b)
X_A: (0, y(C))
V_1 = (0, 1)
V_2 = (0, 2)
V_3 = (0, 3)
V_4 = (0, 4)
V_5 = (0, 5)
V_6 = (0, 6)
V_7 = (0, 7)
V_8 = (0, 8)
V_9 = (0, 9)
U_1 = (1, 0)
U_2 = (2, 0)
U_3 = (3, 0)
U_4 = (4, 0)
U_5 = (5, 0)
U_6 = (6, 0)
U_7 = (7, 0)
U_8 = (8, 0)
text4: "π_1 = " + π_1 + "%"
T_2 = Point(b)
F_1 = (2.5, 10)
F_2 = (7.5, 0)
a = Segment(F_1, F_2)
A = Intersect(a_1, a)
B: (((-0.5) * π_1) + 7.5, π_1)
c = Segment(X_A, B)
w = Vector(A, B)
d = Vector(B, C)
text20: "    Initially, workers and firms expect the inflation 
rate to be 5%.
    However, contractionary monetary and fiscal 
policies move the short-run equilibrium down the 
short-run Phillips curve, i.e. from A to B, causing 
the inflation rate to be " + π_1 + "%.
    Workers and firms then revise their expectations 
of inflation from 1.5% to " + π_1 + "%, the latter becoming 
embedded in the economy. The short-run Phillips 
curve shifts from C_1 to C_2. 
    When the economy's equilibrium returns to the 
natural rate of unemployment of 5%, C becomes
the new equilibrium point with an inflation rate of " + π_1 + "%. 
    You may slide π_1 to modify the effects of 
policies which move the equilibrium point from A to 
B to C and cause the shift from C_1 to C_2."