Which economic concept describes an inverse relationship between inflation and unemployment, as suggested by the Phillips curve?

Which economic concept describes an inverse relationship between inflation and unemployment, as suggested by the Phillips curve?

• A. Phillips curve
• B. Federal Reserve
• C. Reserve ratio
• D. Money supply

Answer: (A)

This describes the idea that inflation and unemployment move in opposite directions in the short run. When unemployment is low and the labor market is tight, employers compete for workers and raise wages, which can lead to higher prices for goods and services—pushing inflation up. When unemployment is high, demand weakens, wage growth slows, and inflation tends to fall. This inverse relationship between inflation and unemployment is what the Phillips curve represents. The other options point to institutions or monetary quantities rather than the inflation–unemployment trade-off, so they don’t capture this dynamic.

This describes the idea that inflation and unemployment move in opposite directions in the short run. When unemployment is low and the labor market is tight, employers compete for workers and raise wages, which can lead to higher prices for goods and services—pushing inflation up. When unemployment is high, demand weakens, wage growth slows, and inflation tends to fall. This inverse relationship between inflation and unemployment is what the Phillips curve represents. The other options point to institutions or monetary quantities rather than the inflation–unemployment trade-off, so they don’t capture this dynamic.