What is the short-run Phillips curve based on?
A) on labour contracts that reflect a given expected price level
B) on labour contracts that reflect a given expected unemployment level
C) on labour contracts that reflect a given expected money supply
D) on labour contracts that reflect a given expected aggregate demand

Question

What is the short-run Phillips curve based on?  
A) on labour contracts that reflect a given expected price level 
B) on labour contracts that reflect a given expected unemployment level 
C) on labour contracts that reflect a given expected money supply 
D) on labour contracts that reflect a given expected aggregate demand

Quizplus · Accepted Answer

The short-run Phillips curve is based on labour contracts that reflect a given expected price level. It shows the inverse relationship between inflation and unemployment in the short run. With fixed wages and prices, as aggregate demand increases, firms must hire more workers, leading to lower unemployment but higher inflation. Conversely, if aggregate demand falls, unemployment rises but inflation falls. Thus, the Phillips curve suggests a trade-off between inflation and unemployment in the short run.

What Is the Short-Run Phillips Curve Based On