What short-run choice does the Phillips curve illustrate?
A) The choice between higher real wages and higher output
B) The choice between cyclical unemployment and frictional unemployment
C) The choice between a higher capital stock and inflation
D) The choice between higher output per capita and maintaining the natural rate of unemployment
E) The choice between unemployment and inflation.

Question

Quizplus · Accepted Answer

The Phillips curve shows the short-run trade-off between unemployment and inflation. As unemployment decreases (i.e. the economy moves closer to full employment), inflation tends to increase, and vice versa. In the short-run, policymakers face a choice between reducing unemployment (which may lead to higher inflation) or reducing inflation (which may lead to higher unemployment). Therefore, the best choice would be to balance these two objectives, aiming for an optimal level of unemployment and inflation.

What Short-Run Choice Does the Phillips Curve Illustrate