Macroeconomics HL Extensions: Phillips Curve, Schools of Thought, Growth and Inequality
What the exam tests
HL extensions connect short-run policy to long-run constraints: the Phillips curve, monetarist and Keynesian perspectives, growth models and inequality. The exam rewards diagrams with expectations, NAIRU and distributional analysis.
Core rules
- The short-run Phillips curve (SRPC) shows a trade-off between inflation and unemployment for a given expected inflation. The long-run Phillips curve (LRPC) is vertical at the NAIRU.
- Monetarists stress expectations and the natural rate; Keynesians emphasise demand-deficient unemployment and sticky wages. Rational expectations make anticipated policy ineffective.
- Growth models: Solow stresses capital, labour and technology with diminishing returns; endogenous growth stresses human capital, research and development, and institutions.
- Inequality is shown by the Lorenz curve and summarised by the Gini coefficient (0 = perfect equality, 1 = perfect inequality). Growth does not automatically reduce poverty.
Worked example
Suppose expected inflation is 3% and unemployment is 5%. Expansionary policy raises actual inflation to 6% and cuts unemployment to 4%: a movement along the SRPC. Once workers and firms revise expectations upward, the SRPC shifts up. In the long run, unemployment returns to the NAIRU of 5% at 6% inflation, so the LRPC is vertical. Evaluation: if expectations are anchored and credibility is high, the inflation cost of expansion may be smaller.
Traps
Do not draw a long-run trade-off. Do not confuse a movement along the SRPC with a shift. Do not say the Gini coefficient measures absolute poverty. Do not assume a falling Gini always means the poor are richer; Lorenz curves can cross. Distinguish growth in GDP from development.