Question : According to the Phillips curve, a decrease in unemployment is likely to result in:
Option 1: Higher inflation
Option 2: Lower inflation
Option 3: No change in inflation
Option 4: Deflation
Answer (1)
20th Jan, 2024
Correct Answer:
Higher inflation
Solution : The correct answer is (a) Higher inflation.
The original Phillips curve suggested an inverse relationship between inflation and unemployment. When the unemployment rate decreases, indicating a tighter labor market with more people employed, it tends to put upward pressure on wages and production costs. As firms face higher labor costs, they may pass on those increased costs to consumers in the form of higher prices, leading to inflationary pressures.
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