What is the short-run Phillips curve, and how does it relate to inflation and unemployment in the AS-AD framework?

• A. The curve is upward sloping
• B. The curve is downward sloping
• C. The curve is horizontal
• D. The curve is vertical at all times

Answer: (B)

In the short run, inflation and unemployment move in opposite directions, so the short-run Phillips curve slopes downward. When aggregate demand is strong, output rises and unemployment falls, but price and wage pressures build as resources tighten, pushing inflation up. When demand weakens, unemployment rises and inflation tends to fall. In the AS-AD framework, you move along this downward-sloping curve as shifts in aggregate demand change the balance of inflation and unemployment in the near term. Over time, expectations adjust and the long-run relationship changes, but the short-run curve captures that near-term trade-off.