The Phillips curve
A) holds that people's expectations of future inflation are based on their most recent experiences.
B) is the combination of high unemployment rates and high inflation.
C) holds that people form expectations on the basis of all available information.
D) involves the strategic use of monetary policy to counteract macroeconomic expansions and contractions.
E) indicates a short-run inverse relationship between inflation and unemployment rates.

Question

Quizplus · Accepted Answer

The Phillips curve indicates a short-run inverse relationship between inflation and unemployment rates. As unemployment decreases, inflation tends to increase, and as unemployment increases, inflation tends to decrease. This relationship is only expected to hold in the short run and not in the long run. Choices A, C, and D are incorrect as they do not accurately describe the Phillips curve. Choice B is also incorrect as high unemployment rates and high inflation would be represented by a point above and to the right of the Phillips curve, rather than on it.

The Phillips Curve