The relationship between the AS-AD model and the Phillips curve points out that as aggregate demand increases, the unemployment rate
A) decreases and the inflation rate rises.
B) increases and the inflation rate falls.
C) decreases and the price level falls.
D) increases and the inflation rate rises.
E) decreases and the inflation rate does not change, only the price level rises.

Question

Quizplus · Accepted Answer

According to the Phillips curve, there is an inverse relationship between the unemployment rate and the inflation rate. As aggregate demand increases, firms will increase production and hire more workers, leading to a decrease in the unemployment rate. However, this increase in production can also lead to higher prices as demand exceeds supply, resulting in an increase in the inflation rate. Therefore, the correct answer is A: as aggregate demand increases, the unemployment rate decreases and the inflation rate rises.

The Relationship Between the AS-AD Model and the Phillips Curve