The short-run Phillips curve is based on the assumption of:
A)a direct relationship between the inflation rate and unemployment.
B)an inverse relationship between the inflation rate and unemployment.
C)no relationship between the inflation rate and unemployment.
D)a permanent trade-off between the inflation rate and unemployment.

Question

The short-run Phillips curve is based on the assumption of:
A)​a direct relationship between the inflation rate and unemployment.
B)​an inverse relationship between the inflation rate and unemployment.
C)​no relationship between the inflation rate and unemployment.
D)​a permanent trade-off between the inflation rate and unemployment.

Quizplus · Accepted Answer

The short-run Phillips curve is based on the assumption of an inverse relationship between the inflation rate and unemployment. This means that as unemployment decreases, inflation increases, and vice versa. This relationship holds true in the short run because firms may be able to increase production in response to increased demand without having to raise prices immediately. However, in the long run, this relationship breaks down as changes in inflation expectations lead to changes in wage and price setting behavior.

The Short-Run Phillips Curve Is Based on the Assumption Of