The inverse relationship between the inflation rate and the unemployment rate is a result of the assumption that
A) all inflation is demand-side inflation.
B) as the unemployment rate falls, demand for products and resources decreases.
C) as the unemployment rate rises, bottlenecks occur throughout the economy.
D) there is a significant amount of excess capacity at low unemployment rates.
E) as prices rise, unemployment also rises.

Question

Quizplus · Accepted Answer

The inverse relationship between the inflation rate and the unemployment rate is often explained by the Phillips Curve, which assumes that inflation is primarily demand-side. This means that when demand for goods and services increases, prices (inflation) rise, and unemployment falls because more workers are needed to meet the increased demand.

The Inverse Relationship Between the Inflation Rate and the Unemployment