Question

Consider the short-run Phillips curve, the unemployment rate and inflation rate are considered to

have a positive relationship.

have an unknown relationship.

have an inverse or negative relationship.

Consider the short-run Phillips curve, the unemployment rate and inflation rate are considered to

have a positive relationship.

have an unknown relationship.

have an inverse or negative relationship.

Answer 1

The correct option would be

• have an inverse or negative relationship.

In the short run, the Phillip's carve states that the unemployment rate and inflation have negative relationship. The reason goes that, as the price increases, so does the wages, and all this is reflected in increase in labor supply, and hence lower unemployment. The vice-versa happens as price decreases. It is in the long run, that the Phillip's curve is horizontal, stating the fact that in the long run, people adjust their expectation and the unemployment is returned to its natural rate of unemployment. The graph is as below.

Supposing that the economy is in point A. The government increases the price, and the unemployment decreases, so that the economy goes from A to B. Afterwards, as people adjust their expectation, and as the short run Phillip's curve shifts from SRPC1 to SRPC2, the unemployment is increased again returning to its original value as A, and economy goes from point B to C. Note that the inflation stays the same as point B.