Question

Phillips curve highlights the relationship between______________

• A. Public income and tax rate
• B. Employment and inflation
• C. Tax revenue and tax rate
• D. Wage rate and unemployment

Hint:

Remember the key economic curves: \textbf{Phillips Curve} (Inflation vs. Unemployment), \textbf{Laffer Curve} (Tax Rate vs. Tax Revenue), and \textbf{Kuznets Curve} (Economic Growth vs. Inequality).

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
The Phillips curve is a single-equation economic model that describes a historical inverse relationship between rates of unemployment and corresponding rates of inflation that result within an economy.

Step 2: Detailed Explanation:
The original curve, proposed by A. W. Phillips, showed an inverse relationship between the rate of change of money wages and the unemployment rate in the UK. However, economists like Paul Samuelson and Robert Solow soon adapted this to show a relationship between price inflation and unemployment.
The relationship is typically stated as:

Low unemployment is associated with high inflation.
High unemployment is associated with low inflation.
Since employment is the inverse of unemployment (high employment means low unemployment), the relationship can also be described as a positive correlation between employment and inflation.
Option (D) "Wage rate and unemployment" is also historically correct as it refers to the original formulation, but option (B) "Employment and inflation" reflects the more common macroeconomic usage of the concept. In the context of the given options, both could be seen as correct, but the inflation-unemployment trade-off is the more famous interpretation. Given that high employment corresponds to low unemployment, a positive relationship between employment and inflation is equivalent to the inverse relationship between unemployment and inflation.
The Laffer Curve highlights the relationship between tax revenue and tax rate (Option C).

Step 3: Final Answer:
The Phillips curve highlights the relationship between Employment and inflation (or more precisely, unemployment and inflation).