Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Higher unemployment leads to higher inflation due to increased wage demands.
B
Lower unemployment generally results in lower inflation as firms reduce prices.
C
There is an inverse relationship where lower unemployment correlates with higher inflation.
D
Unemployment and inflation have no relationship according to New Keynesian economics.
Understanding the Answer
Let's break down why this is correct
Answer
The Phillips Curve suggests that there is an inverse relationship between unemployment and inflation, meaning that when unemployment is low, inflation tends to be high, and vice versa. This happens because when more people have jobs, they spend more money, which can drive up prices. In New Keynesian economics, this relationship is seen as not always stable, as factors like expectations of future inflation can change how people behave. For example, if people expect prices to rise, they may spend more now, which can increase inflation even if unemployment is still high. Therefore, while the Phillips Curve provides a useful framework, real-world factors can complicate the relationship between these two economic indicators.
Detailed Explanation
The Phillips Curve shows that when more people have jobs, prices tend to rise. Other options are incorrect because This option suggests that high unemployment causes inflation, which is the opposite of what the Phillips Curve shows; This statement says that fewer jobs mean lower prices, which is incorrect.
Key Concepts
unemployment
inverse relationship
New Keynesian economics
Topic
Phillips Curve Insights
Difficulty
hard level question
Cognitive Level
understand
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