According to the Phillips curve, firms _____ prices when output is below the natural level of output, or equivalently, when the unemployment rate is _____ the natural rate of unemployment.
A) raise; above
B) raise; below
C) lower; above
D) lower; below

Question

Quizplus · Accepted Answer

The Phillips curve shows an inverse relationship between unemployment and inflation. This means that when unemployment is above its natural rate, firms will have less pricing power and will lower their prices to remain competitive. Therefore, choice C is correct: firms lower prices when output is below the natural level of output, or equivalently, when the unemployment rate is above the natural rate of unemployment.

According to the Phillips Curve, Firms _____ Prices When Output