The Phillips curve reflects a
A)positive correlation between the inflation rate and the unemployment rate.
B)negative correlation between the inflation rate and the unemployment rate.
C)positive correlation between the inflation rate and the exchange rate.
D)negative correlation between the inflation rate and government spending.
E)positive correlation between interest rates and the unemployment rate.

Question

Quizplus · Accepted Answer

The Phillips curve reflects a negative correlation between the inflation rate and the unemployment rate. As unemployment decreases, the competition for workers increases, causing wages to rise, and leading to an increase in the cost of production, which, in turn, can lead to higher prices and inflation. However, if unemployment is high, there is less competition for workers, causing wages to fall, leading to lower costs and lower inflation. Thus, there is an inverse relationship between the two, as shown on the Phillips curve.

The Phillips Curve Reflects a