What relationship is portrayed by the short-run Phillips curve?
A) a direct relationship between total employment and the inflation rate
B) an inverse relationship between inflation and total employment
C) a direct relationship between the unemployment rate and the inflation rate
D) an inverse relationship between the unemployment rate and the inflation rate

Question

What relationship is portrayed by the short-run Phillips curve?  
A) a direct relationship between total employment and the inflation rate 
B) an inverse relationship between inflation and total employment 
C) a direct relationship between the unemployment rate and the inflation rate 
D) an inverse relationship between the unemployment rate and the inflation rate

Quizplus · Accepted Answer

The short-run Phillips curve portrays an inverse relationship between the unemployment rate and the inflation rate. As the unemployment rate decreases, the demand for labor typically increases, leading to higher wages, and in turn, higher production costs. Firms may then choose to pass on these higher costs to consumers in the form of higher prices, leading to inflation. On the other hand, as the unemployment rate increases, the demand for labor decreases, leading to lower production costs, and lower prices. Thus, there is an inverse relationship between the unemployment rate and the inflation rate, as depicted by the short-run Phillips curve.

What Relationship Is Portrayed by the Short-Run Phillips Curve