At one time, policy makers interpreted the Phillips curve as offering a menu of inflation-unemployment choices. Today, the curve is no longer viewed this way. Why has the interpretation changed?
The original view stemmed from the effect of demand-side changes on inflation and unemployment. Policy makers thought they could reduce unemployment by increasing aggregate demand, albeit at the cost of higher inflation. But it is now recognized that these points are not sustainable, so in the long run wages and other costs will adjust, pushing the economy toward the natural rate of unemployment. An increase in AD will lead to higher resource costs and an eventual decrease in short-run AS, resulting in a higher price level and the loss of jobs created in the short run.
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