Answer to Question #135061 in Macroeconomics for Valerie

Question

Choose the correct answer
According to the Phillips curve, unemployment will return to its original rate when [1] price level decreases due to the increase in the interest rate.
[2] increase in inflation rate is lower than a rise in real output demanded.
[3] real wages decline and cause equilibrium level of real output to increase.
[4] price of factors of production decrease and total production decreases.

Answer 1

According to Philips curve, unemployment is inversely proportional to inflation. That is, when unemployment increases, inflation decreases and vice versa.

Therefore for unemployment to rate to original state(decrease in unemployment rate), then then their should be increase in inflation rate. In line with this, the correct answer is (2) above.

According to the Phillips curve, unemployment will return to its original rate when increase in inflation rate is lower than a rise in real output demanded.