What does the Phillips curve illustrate?

The Phillips curve illustrates an inverse relationship between inflation and unemployment. This concept suggests that as the rate of inflation increases, the rate of unemployment tends to decrease, and conversely, when inflation is low, unemployment is generally higher. The rationale behind this relationship is that lower unemployment often leads to higher demand for goods and services, which can push prices up, resulting in higher inflation. Conversely, when unemployment is high, demand tends to be lower, contributing to lower inflation rates.

This relationship is particularly relevant in understanding how monetary policy can be used to manage inflation and unemployment. Policymakers may consider the trade-offs demonstrated by the Phillips curve when making decisions that affect the economy because pursuing low unemployment can sometimes lead to higher inflation and vice versa.

The other choices represent different economic relationships that do not align with the core concept of the Phillips curve. For instance, direct relationships between inflation and economic growth or correlations involving interest rates and stock prices address different aspects of economic theory and do not capture the specific dynamics between inflation and unemployment captured by the Phillips curve.