📚 Learning Guide
Phillips Curve Dynamics
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How does an increase in the unemployment rate generally affect cost-push inflation according to the Phillips Curve dynamics?

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Choose the Best Answer

A

It reduces cost-push inflation due to decreased demand for wages.

B

It increases cost-push inflation by raising input prices.

C

It has no effect on cost-push inflation.

D

It decreases cost-push inflation by increasing supply.

Understanding the Answer

Let's break down why this is correct

Answer

The Phillips Curve suggests that there is a relationship between unemployment and inflation. When the unemployment rate increases, it usually means that fewer people have jobs, which can reduce overall spending in the economy. With less demand for goods and services, businesses may not feel the need to raise their prices, leading to lower inflation or even deflation. For example, if a factory has to lay off workers and fewer people can afford to buy its products, it might lower prices to attract customers. Therefore, an increase in unemployment often leads to lower inflation, showing the trade-off presented by the Phillips Curve.

Detailed Explanation

When more people are unemployed, there is less competition for jobs. Other options are incorrect because Some might think that higher unemployment means businesses pay more for inputs; It may seem like unemployment wouldn't change anything.

Key Concepts

unemployment rate
cost-push inflation
Topic

Phillips Curve Dynamics

Difficulty

medium level question

Cognitive Level

understand

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