Refer to the diagram for a speciﬁc economy. Which of the following best describes the relationship shown by this curve?
A) The demand for labor is large when the rate of inﬂation is low.
B) When the rate of unemployment is high, the rate of inﬂation is high.
C) The rate of inﬂation and the rate of unemployment are inversely related.
D) The rate of inﬂation and the rate of unemployment are directly related.

Question

Refer to the diagram for a speciﬁc economy. Which of the following best describes the relationship shown by this curve?
A) The demand for labor is large when the rate of inﬂation is low. 
B) When the rate of unemployment is high, the rate of inﬂation is high. 
C) The rate of inﬂation and the rate of unemployment are inversely related. 
D) The rate of inﬂation and the rate of unemployment are directly related.

Quizplus · Accepted Answer

The curve shown is the Phillips curve which depicts an inverse relationship between the rate of inflation and the rate of unemployment. As the rate of unemployment decreases, the demand for labor increases and wages rise, leading to an increase in the rate of inflation. On the other hand, as the rate of unemployment increases, the demand for labor decreases, leading to stable or decreasing wages, and thus a decrease in the rate of inflation. Therefore, the rate of inflation and the rate of unemployment are inversely related, making option C the correct choice.

Refer to the Diagram for a Speciﬁc Economy