Which of the following is true according to the short-run Phillips curve?

• A. Higher inflation always leads to higher unemployment in the short run.
• B. The short-run Phillips curve is vertical at the natural rate of unemployment.
• C. There is a trade-off between inflation and unemployment in the short run.
• D. The short-run Phillips curve shows no relationship between inflation and unemployment.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the short-run Phillips curve concept. It represents the inverse relationship between inflation and unemployment in the short run, meaning that as inflation increases, unemployment tends to decrease, and vice versa.
2. Step 2: Recall that the short-run Phillips curve is downward sloping, which implies a trade-off between inflation and unemployment. This means policymakers can choose between higher inflation with lower unemployment or lower inflation with higher unemployment in the short run.
3. Step 3: Recognize that the statement 'Higher inflation always leads to higher unemployment' contradicts the short-run Phillips curve because it suggests a positive relationship, which is not true in the short run.
4. Step 4: Note that the short-run Phillips curve is not vertical; the vertical Phillips curve applies in the long run when unemployment equals the natural rate and inflation expectations adjust.
5. Step 5: Conclude that the correct interpretation of the short-run Phillips curve is that there is a trade-off between inflation and unemployment in the short run, which matches the third option.