In the Phillips curve framework, macroeconomic “gaps” describe how far the economy is from its long-run equilibrium. Interpreting whether a point lies left or right of long-run equilibrium links unemployment, inflation, and output conditions.

Setting the Reference Point on the Phillips Curve

To identify inflationary versus recessionary gaps on a Phillips curve diagram, you need a benchmark: long-run equilibrium. Long-run equilibrium corresponds to the economy operating at potential output with unemployment at the natural rate.

This OpenStax figure links long-run equilibrium to a vertical long-run Phillips curve at the natural rate of unemployment. The key takeaway is that, in the long run, unemployment returns to $u_n$ even when the inflation rate changes, so the LRPC acts as the fixed reference line for deciding whether unemployment is “too low” or “too high.” Source

Key ideas you must anchor

• The LRPC (long-run Phillips curve) marks the natural rate of unemployment ($u_n$).

• Long-run equilibrium occurs where the economy’s point is consistent with unemployment at $u_n$ (i.e., on the LRPC).

• Any point not on long-run equilibrium implies an output gap:

  • Output above potential implies an inflationary gap.

  • Output below potential implies a recessionary gap.

Defining Inflationary and Recessionary Gaps (Phillips Curve Interpretation)

A point left of long-run equilibrium on the Phillips curve corresponds to an inflationary gap because it indicates lower unemployment than the natural rate. In the short run, tighter labor markets typically coincide with higher inflation than at long-run equilibrium.

Between this and the next gap, focus on “left vs right” as a statement about unemployment relative to the natural rate, not simply “high vs low inflation.”

A point right of long-run equilibrium corresponds to a recessionary gap because it indicates higher unemployment than the natural rate. With slack in labor markets, inflation is typically lower than at long-run equilibrium (and may fall relative to expectations).

“Left” and “Right” Mean Unemployment Conditions First

When the syllabus states: points left of long-run equilibrium are inflationary gaps and points right are recessionary gaps, the primary interpretation is:

• Left of long-run equilibrium (inflationary gap)

  • Unemployment: $u < u_n$

  • Output: above potential

  • Inflation environment: upward pressure on inflation

• Right of long-run equilibrium (recessionary gap)

  • Unemployment: $u > u_n$

  • Output: below potential

  • Inflation environment: downward pressure on inflation

Common Diagram Reading Rules (What to Look For)

Because different graphs may show different elements (a single SRPC, an LRPC, and a current point), use these reading rules:

If the LRPC is shown

• Use the LRPC as the divider:

  • Point left of LRPC → inflationary gap

  • Point right of LRPC → recessionary gap

• The point on the LRPC represents long-run equilibrium (no gap).

If only a point relative to “long-run equilibrium” is described

• Translate the description into unemployment:

  • “Left of long-run equilibrium” means unemployment is too low (economy overheated).

  • “Right of long-run equilibrium” means unemployment is too high (economy underperforming).

Connecting Gaps to Output Without Switching Models

Even though “gaps” often come from the AD–AS model, on the Phillips curve they are still about real output relative to potential, inferred through unemployment:

• Lower-than-natural unemployment implies firms are producing at a pace consistent with output above potential.

• Higher-than-natural unemployment implies production consistent with output below potential.

This is why the Phillips curve can label the same macro condition as:

• Inflationary gap ↔ overemployment conditions (tight labour market)

• Recessionary gap ↔ underemployment conditions (slack labour market)

What You Should Be Able to Do on AP-Style Prompts

• Identify whether a plotted point represents an inflationary gap or recessionary gap based on its position relative to long-run equilibrium.

• State the implied relationship between:

  • unemployment and the natural rate, and

  • real GDP and potential GDP.

• Use precise phrasing: “left of long-run equilibrium” and “right of long-run equilibrium” rather than vague statements like “inflation is high” or “inflation is low.”