The negative relationship between inflation and unemployment can be explained by the aggregate supply and demand curves.

Question

Quizplus · Accepted Answer

According to the Phillips curve, there is an inverse relationship between inflation and unemployment, which can be explained by the aggregate supply and demand curves. As unemployment decreases, firms may have to increase wages in order to attract and retain employees, which can lead to higher production costs and thus higher prices. As a result, the aggregate supply curve shifts leftward, causing an increase in inflation. On the other hand, when there is high unemployment, there is less upward pressure on wages and thus lower production costs, leading to lower prices and a rightward shift of the aggregate supply curve, resulting in lower inflation.

The Negative Relationship Between Inflation and Unemployment Can Be Explained