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This diagram shows stagflation using the short run Phillips curve (SRPC). Stagflation occurs when an economy experiences both higher inflation and higher unemployment at the same time. The outward shift of the SRPC from SRPC1 to SRPC2 shows that for any given unemployment rate, inflation is now higher, and for any given inflation rate, unemployment is now higher. This can happen after a negative supply shock that raises production costs.
SRPC1: The original short run Phillips curve showing the initial trade off between inflation and unemployment.
SRPC2: The outward shifted short run Phillips curve showing higher inflation for any unemployment rate.
NRU: The natural rate of unemployment, the long run level of unemployment when the labour market is in equilibrium.
The short run Phillips curve (SRPC1) shows an initial trade off between inflation and unemployment.
A negative supply shock shifts the SRPC outwards from SRPC1 to SRPC2.
After the shift, the economy moves to a point with higher inflation and higher unemployment compared to before.
This combination of rising inflation and rising unemployment is called stagflation.
The NRU (natural rate of unemployment) is shown as a reference level of unemployment, but stagflation can occur even when unemployment moves further away from it.
Explore other diagrams from the same unit to deepen your understanding
A diagram illustrating the fluctuations in real GDP over time, including periods of boom, recession, peak, and trough, relative to the long-term trend of economic growth.
This diagram shows the intersection of the aggregate demand (AD) and short-run aggregate supply (AS) curves to determine the equilibrium price level and real GDP.
A diagram showing the Classical model of aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS), used to explain long-run macroeconomic equilibrium.
A Keynesian aggregate demand and long-run aggregate supply (AD–LRAS) diagram showing how real GDP and the price level interact across different phases of the economy, including spare capacity and full employment.
A diagram showing an output (deflationary) gap, where the economy is producing below its full employment level of output (Ye).
This diagram shows how an initial increase in aggregate demand leads to a multiplied increase in national output (real GDP) and price level within the Keynesian framework.
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