Multiple Choice
When the domestic currency depreciates, which of the following best describes the effect on the short-run Phillips curve?
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20. Tradeoffs Between Inflation and Unemployment
Short Run Phillips Curve
Multiple Choice
Which of the following is true according to the short-run Phillips curve?
A
Higher inflation always leads to higher unemployment in the short run.
B
The short-run Phillips curve is vertical at the natural rate of unemployment.
C
There is a trade-off between inflation and unemployment in the short run.
D
The short-run Phillips curve shows no relationship between inflation and unemployment.
Verified step by step guidance1
Step 1: Understand the short-run Phillips curve concept. It represents the inverse relationship between inflation and unemployment in the short run, meaning that as inflation increases, unemployment tends to decrease, and vice versa.
Step 2: Recall that the short-run Phillips curve is downward sloping, which implies a trade-off between inflation and unemployment. This means policymakers can choose between higher inflation with lower unemployment or lower inflation with higher unemployment in the short run.
Step 3: Recognize that the statement 'Higher inflation always leads to higher unemployment' contradicts the short-run Phillips curve because it suggests a positive relationship, which is not true in the short run.
Step 4: Note that the short-run Phillips curve is not vertical; the vertical Phillips curve applies in the long run when unemployment equals the natural rate and inflation expectations adjust.
Step 5: Conclude that the correct interpretation of the short-run Phillips curve is that there is a trade-off between inflation and unemployment in the short run, which matches the third option.
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