The labor market Phillips curve shows:
A)a direct relationship between unemployment and inflation.
B)a direct relationship between unemployment and inflation
C)an inverse relationship between unemployment and inflation.
D)an inverse relationship between unemployment and inflation
E)consequences of the misperceptions theory.
F)consequences of the misperceptions theory
G)the optimal level of employment
H)the optimal level of employment.

Question

Quizplus · Accepted Answer

The labor market Phillips curve shows an inverse relationship between unemployment and inflation. As unemployment decreases, inflation tends to increase, and as unemployment increases, inflation tends to decrease. This relationship is based on the idea that as the labor market tightens (i.e. unemployment decreases), workers have more bargaining power to negotiate higher wages, which leads to higher costs for firms and ultimately higher prices and inflation. On the other hand, when unemployment is high, workers have less bargaining power and firms are able to keep wages low, keeping costs and inflation low as well.

The Labor Market Phillips Curve Shows