AP Syllabus focus: ‘Demand shocks cause movement along the short-run Phillips curve.’
Demand shocks change aggregate demand (AD), altering real output and unemployment in the short run. On the short-run Phillips curve (SRPC), these changes show up as movement to a different point along the same curve.
Core idea: demand shocks move the economy along the SRPC
Key terms
Short-run Phillips curve (SRPC): A downward-sloping relationship in the short run between the inflation rate and the unemployment rate, holding inflation expectations and key supply conditions constant.
A demand shock changes total spending on domestically produced goods and services, shifting AD and changing both inflation and unemployment in the short run.
Demand shock: An unexpected change in aggregate demand that changes real output and the price level in the short run.
When a demand shock occurs, the economy does not “jump to a new SRPC” (that’s a shift). Instead, it moves to a different inflation–unemployment combination on the existing SRPC.
How movement along the SRPC works
This slide summarizes how aggregate demand (AD) shocks translate into movement along the short-run Phillips curve (SRPC). A positive demand shock increases inflation and lowers unemployment (an up-left move), while a negative demand shock lowers inflation and raises unemployment (a down-right move). Source
Positive (expansionary) demand shock: move up and left
A positive demand shock increases AD.
Real GDP rises in the short run, so firms hire more workers
Unemployment falls
Stronger demand bids up prices and/or wages, so inflation rises
On the SRPC graph (inflation on vertical axis, unemployment on horizontal axis), the economy moves up and left along the same SRPC
Negative (contractionary) demand shock: move down and right
A negative demand shock decreases AD.
Real GDP falls in the short run, so firms reduce hiring
Unemployment rises
Weaker demand slows price increases, so inflation falls (disinflation) and may become negative (deflation) if severe
On the SRPC, the economy moves down and right along the same SRPC
Why AD changes translate into inflation and unemployment changes
The SRPC is a short-run relationship because some key adjustments are sticky.
Many wages and input contracts adjust slowly
Firms respond to unexpectedly higher demand by increasing production
Higher production typically requires more labour hours, reducing unemployment
As output rises relative to normal capacity, costs and markups tend to increase, raising inflation
A standard way to represent “movement along” is to treat expected inflation and the natural rate as fixed during the shock.
= inflation rate (percent per year)
= expected inflation rate (percent per year)
= unemployment rate (percent of labour force)
= natural rate of unemployment (percent of labour force)
= responsiveness parameter (unitless, positive)
In this setup, a demand shock that changes real activity changes unemployment (u), which implies a corresponding change in inflation (π)—a movement along the same SRPC as long as expected inflation (πᵉ) and uₙ are unchanged.
Common sources of demand shocks (what can suddenly change AD)
Demand shocks can originate from any component of spending or from financial conditions that affect spending:
Consumption: changes in consumer confidence, wealth, or credit access
Investment: changes in business expectations, interest rates, or profitability
Government spending: sudden changes in government purchases
Net exports: changes in foreign income, exchange rates, or trade conditions
The SRPC movement is the macro “symptom”: the shock changes total spending, and the economy slides to a new point with a different inflation–unemployment mix.
These paired diagrams link an AD–AS demand shock to the matching movement on the Phillips curve. The AD shift changes real GDP and the price level in the short run, and the Phillips curve panel mirrors that outcome as a new inflation–unemployment point on the same SRPC. This is a useful way to check consistency across models when drawing AP-style graphs. Source
What to do on an AP-style Phillips curve graph
Label axes: inflation rate (vertical) and unemployment rate (horizontal)
Draw a single downward-sloping SRPC
Mark an initial point (often near the natural rate)
For a positive demand shock: draw an arrow to a point up/left
For a negative demand shock: draw an arrow to a point down/right
State the direction of change in each variable: inflation and unemployment move in opposite directions along the SRPC
FAQ
Because the SRPC is conditional on factors like expected inflation and key supply conditions.
If those conditions are unchanged, only unemployment and inflation adjust, producing a new point on the same curve.
Disinflation means inflation is still positive but falling.
Deflation means inflation becomes negative; on the SRPC this is a move to a lower inflation rate that crosses below zero.
In the immediate short run, expectations may be relatively fixed, supporting movement along a stable SRPC.
If expectations adjust later, the relationship may no longer be the same SRPC.
In the short run, higher overall spending tends to raise output and employment while also increasing price pressures.
That creates an inverse relationship between unemployment and inflation for given expectations.
Yes.
Different shocks (for example, weaker investment but stronger net exports) can offset in net, producing the same overall AD change and therefore the same inflation–unemployment outcome on the SRPC.
Practice Questions
Q1 (2 marks) Define a demand shock and state how it affects the economy’s position on the short-run Phillips curve.
Correct definition: an unexpected change in aggregate demand (1)
Correct effect: causes movement to a different point along the existing SRPC (not a shift), changing inflation and unemployment in opposite directions (1)
Q2 (6 marks) An economy experiences a sudden rise in consumer confidence that increases aggregate demand. (a) On a short-run Phillips curve diagram, show the change in the economy’s position. (2 marks) (b) Explain the resulting changes in inflation and unemployment. (4 marks)
Correctly drawn downward-sloping SRPC with axes labelled inflation and unemployment (1)
Movement shown up and left to a new point on the same SRPC (1) (b)
AD rises, so firms increase output in the short run (1)
Higher output increases labour demand, so unemployment falls (1)
Stronger demand raises the price level growth/creates demand-pull inflation, so inflation rises (1)
Explicit link that this is movement along SRPC (demand shock) with inflation and unemployment changing in opposite directions (1)
