Chapter 28, Problem 28.1.1RQ

To determine

The Phillips curve.

Explanation of Solution

The Phillips curve is used by the economists to depict the short-run relation between the inflation rate and the unemployment rate in an economy. The inflation rate and the unemployment rate are the two evils which every economy tries to minimize in the short-run as well as in the long-run. But, the government cannot reduce them both at the same time. When they focus on reducing the unemployment rate, it will lead to an increase in the inflation rate and vice versa. This trade-off between the inflation rate and unemployment is explained with the help of the Phillips curve and it can be represented as follows:

In Figure 1, the horizontal axis measures the unemployment rate and the vertical axis measures the inflation rate. It depicts the negative relationship between the unemployment and inflation rate. When the inflation rate is higher, the level of unemployment rate is lower and vice versa.

Economics Concept Introduction

Concept introduction:

Phillips curve: Phillips curve shows the relationship and trade-off between the inflation rate and unemployment rate in an economy during the short-run period.