A Level explanation

The Phillips curve shows an inverse short-run relationship between the rate of inflation and the unemployment rate. When unemployment is low, wage and price pressures tend to be stronger, so inflation is higher; when unemployment is high, inflation tends to be lower.

In Theme 2, use it to explain why policymakers may face a trade-off in the short run (e.g. expansionary demand policy can reduce unemployment but may raise inflation). Favourable supply shocks shift the Phillips curve left (lower inflation at each unemployment rate); unfavourable shocks shift it right. Each new curve is parallel to the last.

Evaluation: the relationship is not stable in the long run — the expectations-augmented Phillips curve and vertical LRAS suggest demand-side policy cannot permanently reduce unemployment below the natural rate without accelerating inflation. Link to monetarist and New Classical views in 25-mark essays.