The Phillips Curve describes what kind of relationship in the short run between inflation and unemployment?

• A. A guaranteed inverse relationship that holds in the long run.
• B. No relationship at all between inflation and unemployment.
• C. A short-run trade-off where high inflation may coincide with low unemployment, but there is no stable long-run rule.
• D. A direct relationship where higher inflation always means higher unemployment.

Answer: (C)

The main idea here is that in the short run there’s a trade-off between inflation and unemployment. When aggregate demand is stronger, unemployment tends to fall while prices rise, so higher inflation can occur together with lower unemployment. That’s why the short-run Phillips Curve is downward-sloping. But this relationship doesn’t hold in the long run. If policymakers try to keep unemployment below its natural level by pushing up inflation, people’s expectations adjust, and unemployment tends to return to its natural rate even as inflation stays higher. So there isn’t a stable, long-run rule linking inflation and unemployment.

The other statements don’t fit this nuance: there isn’t a guaranteed inverse relationship in the long run, there isn’t no relationship at all, and there isn’t a direct positive link where higher inflation always means higher unemployment. The best description is a short-run trade-off with no lasting long-run rule.