The short-run Phillips curve shows that
A)the economy can have low inflation and low unemployment simultaneously
B)the economy can have high inflation and high unemployment simultaneously
C)a reduction in unemployment comes at the expense of lower inflation
D)a reduction in unemployment comes at the expense of higher inflation
E)a reduction in inflation comes at the expense of lower unemployment

Question

Quizplus · Accepted Answer

The short-run Phillips curve shows a trade-off between unemployment and inflation in the short run. Thus, a reduction in unemployment (moving to the left along the curve) comes at the expense of higher inflation, and vice versa. Option D correctly summarizes this relationship. Options A and B are incorrect as they suggest that low/high inflation and low/high unemployment can exist together, which is not what the Phillips curve shows. Option C is opposite to the correct relationship, as it implies that a reduction in unemployment leads to lower inflation. Option E is also incorrect as it suggests that reducing inflation leads to lower unemployment, which is not what the Phillips curve shows in the short run.

The Short-Run Phillips Curve Shows That