The inverse relationship between inflation and unemployment is a result of the fact that
A) as the unemployment rate decreases, it is easier for labor to get wage increases.
B) as the unemployment rate falls, demand for products and resources decreases.
C) as the unemployment rate increases, bottlenecks occur throughout the economy.
D) at low levels of unemployment, there is a significant amount of excess capacity.
E) as prices rise, unemployment also rises.

Question

Quizplus · Accepted Answer

When the unemployment rate is low, there is a shortage of labor which can be exploited by workers to demand higher wages. As wages increase, firms pass on those costs to consumers, leading to inflation. Therefore, there is an inverse relationship between inflation and unemployment, as when unemployment is low, inflation is typically high.

The Inverse Relationship Between Inflation and Unemployment Is a Result