The short-run Phillips curve is
A) vertical at the natural unemployment rate.
B) upward sloping.
C) downward sloping.
D) horizontal at the expected inflation rate.
E) U-shaped.

Question

Quizplus · Accepted Answer

The short-run Phillips curve is downward sloping, which means there is a negative relationship between unemployment and inflation in the short run. As unemployment falls, firms have to compete for a smaller pool of workers, leading to higher wages and costs. These increased costs are passed on to consumers in the form of higher prices, resulting in higher inflation. Conversely, if unemployment rises, firms have less competition for workers and are able to keep wages and costs down, resulting in lower inflation.

The Short-Run Phillips Curve Is