An inverse relationship between unemployment and inflation arises
A) as a mathematical definition, regardless of economic events
B) when technological shocks are the primary force of change in the economy and wage adjustments are rapid
C) when shifts in aggregate demand cause most of the fluctuations in the economy, and wages are sluggish
D) when aggregate demand is stable while aggregate supply is shifting
E) in the long run but not in the short run

Question

Quizplus · Accepted Answer

According to the Phillips curve, there is an inverse relationship between unemployment and inflation, which means that as unemployment decreases, inflation tends to increase and vice versa. This relationship arises when shifts in aggregate demand cause most of the fluctuations in the economy, and wages are sluggish. Technological shocks (as stated in B) and stable aggregate demand with shifting aggregate supply (as stated in D) do not necessarily lead to this relationship. The Phillips curve applies in both the short run and the long run (in contrast to E).

An Inverse Relationship Between Unemployment and Inflation Arises