Question : The short-run Phillips curve suggests that there is a trade-off between:
Option 1: Inflation and unemployment
Option 2: GDP and inflation
Option 3: GDP and unemployment
Option 4: Interest rates and inflation
Correct Answer:
Inflation and unemployment
Solution : The correct answer is (a) inflation and unemployment.
The short-run Phillips curve is derived from the observation that there is an inverse relationship between the rate of inflation and the rate of unemployment in the short run. According to this relationship, when the unemployment rate is low, inflation tends to be high, and when the unemployment rate is high, inflation tends to be low.
It's important to note that this short-run trade-off between inflation and unemployment depicted by the Phillips curve is based on the assumption of a stable and predictable relationship in the short term. Over time, expectations of inflation can adjust, and the trade-off may become less reliable or shift due to various factors such as changes in inflation expectations, supply shocks, and shifts in economic policies. Therefore, the Phillips curve relationship has been subject to further analysis and modifications in economic theory.
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