The short-run Phillips curve shows that as the unemployment rate goes down,_____.
A)unemployment benefit payments go up
B)prices go down
C)the Phillips curve shifts outward
D)the inflation rate goes up
E)there is no change in the rate of inflation

Question

Quizplus · Accepted Answer

The short-run Phillips curve shows an inverse relationship between unemployment and inflation. As the unemployment rate goes down, labor market tightens and firms face more difficulty in finding and hiring workers, leading to higher wages and production costs. To maintain their profit margins, firms may raise their prices, which leads to inflationary pressure in the economy. Thus, a lower unemployment rate is expected to be associated with a higher rate of inflation. Therefore, the correct answer is (D) the inflation rate goes up.

The Short-Run Phillips Curve Shows That as the Unemployment Rate