37. Short-run Phillips curve is upward sloping because:
Answer: B
The short-run Phillips curve is upward sloping because wages and prices are sticky.
In the short run, wages and prices do not adjust immediately to changes in economic conditions, leading to a trade-off between inflation and unemployment. This stickiness results in an upward sloping Phillips curve, as lower unemployment can occur alongside rising inflation.
A) wages/prices flexible
This option is incorrect because if wages and prices were flexible, they would adjust quickly to changes in demand and supply, eliminating the trade-off between inflation and unemployment. A flexible wage and price environment would lead to a vertical long-run Phillips curve, rather than an upward sloping short-run Phillips curve.
B) wages/prices sticky
This is the correct answer as it directly addresses the concept that in the short run, wages and prices do not adjust instantly to changes in economic conditions. This stickiness allows for the existence of the upward sloping Phillips curve, where lower unemployment can coexist with higher inflation.
C) high competition
High competition generally leads to more efficient markets and can contribute to flexible prices and wages. If competition leads to flexibility, it would not support the presence of an upward sloping Phillips curve, making this option incorrect.
D) AD downward sloping
While aggregate demand (AD) is indeed downward sloping, this characteristic does not explain the shape of the short-run Phillips curve. The downward slope of AD relates to the relationship between price levels and output, rather than the trade-off between inflation and unemployment that the Phillips curve illustrates.
Conclusion
The short-run Phillips curve is upward sloping primarily due to the stickiness of wages and prices, which allows for a temporary trade-off between inflation and unemployment. Options A, C, and D fail to capture the critical concept of price and wage rigidity that defines the short-run dynamics depicted by the Phillips curve, reinforcing that B is the definitive correct choice.