Chapter 34, Problem 2MCQ

To determine

The correct option for short-run Philips curve.

Answer to Problem 2MCQ

From the available options, the correct option is negative; unemployment and inflation.

Explanation of Solution

The Philips curve represents that there is a negative or inverse relationship or trade-off between these two factors (inflation and unemployment) in the short run. It means if there is a decrease in aggregate demand along the Philips curve then there is an impact on unemployment and inflation. It occurs because there is a supply shock in the market and any changes in the factors such as inflationary expectations and supply shocks would directly affect the Philips curve. Therefore, in the short run, this curve would show a negative relationship between unemployment and inflation. This relationship cannot be positive as unemployment and inflation affect adversely in the short-run.

Here, the correct option is c (negative; unemployment and inflation).

Economics Concept Introduction

Introduction: Inflation means there is an increase in the price of goods and services in the economy which affects the consumption level of the people in the country. When there is a temporary reduction in price inflation then this is disinflation in the economy. And, the Philips curve represents the inflation and unemployment relationship at different rates in the economy.