What does the short-run Phillips curve illustrate?

The short-run Phillips curve illustrates the trade-off between inflation and unemployment. This concept is based on the observed relationship in the short run that indicates when inflation rises, unemployment tends to fall, and conversely, when inflation decreases, unemployment is likely to rise. This relationship occurs because lower unemployment can lead to higher wage demands from workers, which can, in turn, increase prices as businesses raise their prices to cover higher labor costs.

The short-run Phillips curve is depicted as a downward-sloping curve, highlighting that policymakers may face a choice between different levels of inflation and unemployment in the short run. Thus, understanding this trade-off is crucial for effective macroeconomic policy-making, particularly in addressing short-term economic fluctuations.

In contrast, the other choices focus on different economic relationships. The first option misrepresents the Phillips curve, which does not directly discuss interest rates and inflation in the short run. The third option pertains to fiscal policy's impact on GDP, which is a broader topic encompassing government spending and tax policies but is not captured by the Phillips curve framework. The last option deals with the long-term growth potential of the economy, which is more aligned with concepts like the long-run aggregate supply rather than the short-run dynamics of inflation and unemployment captured by the