AP Macroeconomics / Long-Run Consequences of Stabilization Policies
Lesson
After the shock: wages, inflation, and Phillips
Sticky costs thaw. Expected inflation rewrites the short-run trade-off.
Learning goals
- Show self-correction after a demand shock.
- Explain why a short-run inflation-unemployment trade-off can fade.
Explanation
If AD rises at potential, prices go up and output overshoots. Over time, workers and firms rebuild higher costs into contracts. SRAS shifts left until output is back at potential and the price level is permanently higher. The boom was temporary; the price jump can last.
A short-run Phillips curve pictures lower unemployment with higher inflation when demand is strong. If people come to expect that inflation, the short-run curve can shift up. In a long-run picture, unemployment returns to its natural rate and inflation sits wherever policy and expectations put it.
Key terms
- Natural rate of unemployment. The unemployment rate consistent with potential output, including frictional and structural joblessness.
- Phillips curve. A picture of the short-run relationship between inflation and unemployment, which can shift when expectations change.
Common mistakes
- Treating the short-run Phillips curve as a permanent menu.
- Forgetting to shift SRAS when expected inflation changes.
Practice
Original Marlow Works items. Check the answer explanation after you try.
Suppose the economy is at long-run equilibrium and the central bank unexpectedly increases the money supply. In a short essay, describe the short-run effects on interest rates, investment, and output, then explain the long-run adjustment of the price level and real output.
Original Marlow Works item — not a College Board question.
Take your time—this is practice, not a test.
Answer explanation
AD falls and a recessionary gap opens. If policy does nothing, what happens to SRAS over time?
Answer. Lower wage pressure can shift SRAS right, returning output toward potential at a lower price level.
Unused resources eventually cheapen production, even if the wait is painful.
Related resources
External links with reuse status. Marlow Works is independent and does not copy restricted exam or textbook material.
Official / link only
AP Macroeconomics course page
Official six-unit framework for national income and policy models.
College Board · All rights reserved · accessed 2026-10-01
Open sourceOfficial / link only
FRED economic data
Federal Reserve economic data. Terms vary by series; do not scrape or ingest.
Federal Reserve Bank of St. Louis · Varies by series · accessed 2026-10-01
Open source