What does the Phillips Curve illustrate?

The Phillips Curve illustrates the inverse relationship between inflation and unemployment, which is a key concept in macroeconomic theory. This relationship suggests that when inflation rises, unemployment tends to decline, and conversely, when inflation decreases, unemployment tends to rise. The reasoning behind this dynamic is that lower unemployment often leads to increased demand for goods and services, which can drive prices up, resulting in higher inflation.

This connection is important for policymakers as it helps them understand the trade-offs they may face when trying to achieve economic stability. For example, efforts to reduce unemployment through expansionary monetary policy may result in higher inflation rates. The Phillips Curve has been a foundational concept for economic analysis and has evolved over time, but its core idea of the inverse relationship remains central to discussions about inflation and labor markets.

Other options exploring relationships involving national debt, government spending, or direct relationships do not adequately capture the essence of the Phillips Curve as it is specifically focused on the inflation-unemployment trade-off.