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IAI Actuarial Core Principles · Business Economics · Business activity, unemployment and inflation

In the short-run Phillips curve, a negative relationship is observed between which two variables?

The short-run Phillips curve shows an inverse relationship between the inflation rate and the unemployment rate. When unemployment is low, labour markets are tight and wages and prices rise faster; when unemployment is high, inflationary pressure eases. It does not plot interest rates, exchange rates or savings.

  1. AInflation rate and the unemployment rateCorrect
  2. BInterest rate and the exchange rate
  3. CReal wages and labour productivity
  4. DBudget deficit and the money supply
  5. Output growth and the rate of saving

Explanation

The original Phillips curve showed that lower unemployment is associated with higher wage and price inflation, and vice versa. The other pairs are not what the curve plots. So the trade-off is between inflation and unemployment.

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