The traditional Phillips Curve shows the:
A) Direct correlation between the rate of inflation and the unemployment rate
B) Inverse correlation between the rate of inflation and the rate of unemployment
C) Direct correlation between the short-run and long-run aggregate supply
D) Inverse correlation between the short-run and long-run aggregate supply

Question

Quizplus · Accepted Answer

The traditional Phillips Curve shows an inverse correlation between the rate of inflation and the rate of unemployment. This means that as the rate of unemployment decreases, the rate of inflation increases, and vice versa. This relationship is based on the idea that when unemployment is low, labor becomes more scarce, and firms need to raise wages to attract and retain workers. As wages increase, production costs rise, leading to higher prices, and thus, higher inflation. Conversely, when unemployment rises, wages are typically reduced, which lowers production costs, leading to lower prices and inflation.

The Traditional Phillips Curve Shows The