The Phillips Curve represents the relationship between the rate of inflation and the rate of unemployment.

The curve shows that inflation and unemployment are inversely proportional- i.e when unemployment was high, inflation and wage rates were low, and when unemployment was low, inflation and wage rates were high. It suggests that a short-term trade off must be made between unemployment and inflation. Friedmans Expectations- Augmented Phillips Curve. Friedman argued that the Phillips curve was drawn on the assumption of an expected rate of inflation. If the economy were in a positive output gap, then the inflation that comes with growth would increase future inflationary expectations. He introduced the idea of adaptive expectations- people come to expect a higher rate of inflation in the future if inflation is high now. These expectations may be used by trade unions to demand higher wages as wages often follow prices- if prices in the future go up, then workers will soon want higher wages to cover the increase in their cost of living.