The Phillips curve is upward-sloping because:
A)when prices rise, quantity supplied rises.
B)the more positive the output gap, the higher inflation rises above expected inflation.
C)the more positive the output gap, the lower inflation is when compared to expected inflation.
D)higher unemployment is not related to unexpected inflation.

Question

Quizplus · Accepted Answer

The Phillips curve shows the inverse relationship between unemployment and inflation. When the economy is operating below its potential output (output gap is negative), unemployment is high and inflation is low. Conversely, when the economy is operating above its potential output (output gap is positive), unemployment is low and inflation is high. However, the upward slope of the Phillips curve is due to the fact that the more positive the output gap, the higher the inflation rises above expected inflation (which is based on the natural rate of unemployment). This is because as the economy approaches full employment and capacity constraints, firms must compete more for scarce resources, leading to higher prices and inflation.

The Phillips Curve Is Upward-Sloping Because