Difficulty: Easy

Average Score: 100%

Italy’s current-account transaction is:

Rationale

Short-run Phillips curve shows a downward slope.

The short-run Phillips curve illustrates the inverse relationship between inflation and unemployment rates, indicating that as inflation rises, unemployment tends to fall, and vice versa. This relationship is typically depicted as a downward sloping curve, reflecting the trade-off policymakers face in the short term.

A (Italian firm buys Vietnam land) YOUR ANSWER

A vertical line would suggest that there is no trade-off between inflation and unemployment, meaning that unemployment remains constant regardless of the inflation rate. This depiction aligns more with the long-run Phillips curve, which suggests that in the long run, inflation does not affect unemployment, contrary to the behavior observed in the short run.

B (Italian firm buys African parks) YOUR ANSWER

An upward-sloping curve would imply a direct relationship between inflation and unemployment, indicating that as inflation increases, unemployment also increases. This contradicts the fundamental principle of the short-run Phillips curve, which is based on the inverse relationship between these two variables.

C (China buys Italian leather goods) CORRECT

The downward slope of the short-run Phillips curve highlights the trade-off between inflation and unemployment. In this scenario, when inflation rises, unemployment can decrease, representing the policy choices available to manage economic conditions in the short run.

D (Brazilian firm builds factory in Italy) YOUR ANSWER

A horizontal line would suggest a constant level of inflation regardless of unemployment rates. This scenario does not accurately reflect the dynamics depicted by the short-run Phillips curve, which is meant to illustrate a variable relationship between the two economic indicators rather than a fixed one.

Conclusion

The short-run Phillips curve represents a crucial economic principle, showcasing the inverse relationship between inflation and unemployment through its downward slope. This concept is essential for understanding short-term economic policy implications, where trade-offs between these two variables are prevalent. The other options incorrectly depict relationships that do not align with observed economic behavior in the short run.

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