Aggregate Demand, Aggregate Supply, and the Expectations-Augmented Phillips Curve Panel A shows the economy’s aggregate demand and supply curves, and panel B shows the economy’s Phillips curve, augmented by inflationary expectations. Using expansionary policies to reduce unemployment below u_n, policymakers shift aggregate demand in panel A from AD₀ to AD₁. This moves the economy to point b, with real output and the price level rising to Q₁ and P₁. Unemployment declines to u₁ (point b in panel B), but inflation rises to something approaching 5%. If policymakers attempt to hold unemployment below the natural rate, the economy will endure accelerating inflation. The long-run Phillips curve (LRPC) in panel B shows the relationship between inflation and unemployment when the inflation rate is just equal to inflationary expectations.