Question

If a Phillips curve shows that unemployment is high and inflation is low in the economy, then that economy:

1. is producing at its potential GDP.
2. is producing at a point where output is more than potential GDP.
3. is producing at a point where output is less than potential GDP.
4. is producing at its equilibrium point.

Answer 1

3. is producing at a point where output is less than potential GDP.

Step-by-step explanation:

In Macroeconomics, A phillips curve is used to show relationship between output and input price level. It also show inverse trade off between rates of inflation and rates of unemployment in the economy. If inflation is high, unemploment will be low and vice versa. As aggregrate demand decreases, unemployment increase as more worker are laid off or fired , the real GDP output decrease and the price level decrease, which decrease the inflation.

Aggregate demand is the total demand for final good and services in the economy.