The short-run tradeoff between the unemployment rate and the inflation rate shown by the Phillips curve is represented in the AS-AD model by

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The upward-sloping aggregate supply curve in the AS-AD model represents the short-run tradeoff between unemployment and inflation. As unemployment decreases (movement to the right along the horizontal axis), firms must compete for a limited pool of workers, raising wages and increasing costs of production, causing the aggregate supply curve to shift upward. As a result, price levels increase, leading to inflation. Conversely, as unemployment increases (movement to the left along the horizontal axis), wages and production costs decrease, causing the aggregate supply curve to shift downward, lowering price levels and reducing inflation. This relationship is consistent with the Phillips curve, which shows an inverse relationship between unemployment and inflation.

The Short-Run Tradeoff Between the Unemployment Rate and the Inflation