Exploring the relationship between unemployment and inflation

Short-run Phillips curve (HL only)

The short-run Phillips curve shows the potential trade-off between unemployment and inflation.
An outward shift in AD in an AD/AS diagram is illustrated by an upward movement along the short run Phillips curve (SRPC).
An inward shift in AD in an AD/AS diagram is illustrated by a downward movement along the SRPC
Cost-push inflation or stagflation is illustrated by an outward shift of the SRPC

According to the New Classical school of thought, unemployment will always revert to the natural rate of unemployment in the long term due to flexible resource costs.
Assume there is an outward shift in AD, resulting in higher inflation and reduced unemployment, this causes an upward movement along the SRPC from A to B.
As resources costs adjust to a higher price level, SRAS decreases to SRAS2, resulting in further inflation but also higher unemployment. This causes an outward shift of the SRPC curve.
Ultimately, according to New Classical assumptions, any inflationary gaps will be eliminated in the long run and unemployment will always revert to the natural rate of unemployment.
Hence, in the long run there is no trade-off between inflation and unemployment. This is represented by a vertical long run Phillips curve as the natural rate of unemployment, which correlates to the full employment level of output in the New Classical AD/AS model.
Supply side policies which reduce the natural rate of unemployment can shift the LRAS curve and LRPC respectively.