Economics • Economic BasicsMedium
Consider the relationship between inflation and unemployment described by the original Phillips curve. What does the curve suggest?
A. A stable positive correlation between the rate of inflation and the rate of unemployment
B. An inverse relationship indicating that lower unemployment rates are associated with higher inflation rates✓ Correct Answer
C. Total independence between monetary variables and real labor market indicators in the long run
D. A simultaneous rise in both price levels and unemployment during economic expansions
💡 Solution & Explanation
The original Phillips curve established an empirical inverse relationship between wage inflation and unemployment, suggesting policymakers could trade off lower unemployment for higher inflation. Modern macroeconomic theory distinguishes this short-run tradeoff from the vertical long-run Phillips curve at the natural rate of unemployment. Positive correlations describe stagflation scenarios rather than standard trade-off curves. Milton Friedman and Edmund Phelps later incorporated adaptive expectations to disprove the permanence of this trade-off.
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