Question

What does it mean to say that the Phillips curve presents policy makers with a menu of choices?

Short answer

The Phillips curve provides policymakers with a 'menu of choices' in terms of the trade-off between inflation and unemployment. They can decide to reduce inflation potentially at the expense of higher unemployment, or decrease unemployment at the risk of higher inflation.

Step-by-step solution

Understanding the Phillips Curve

The Philips curve illustrates the inverse relationship between inflation and unemployment. According to this concept, lower unemployment in an economy is associated with higher rates of inflation, and vice versa.

Explaining the Menu of Choices

The 'menu of choices' refers to the trade-off policymakers must consider between inflation and unemployment. This means, they can aim to decrease inflation at the cost of possibly increasing unemployment or vice versa.

Implications of the Choices

It is important to consider that no choice on the menu is inherently 'better' than another. The 'right' choice depends on the specific economic conditions and goals of the policy maker. If an economy is struggling with high unemployment, the policy maker might accept a higher inflation rate to decrease unemployment. On the other hand, in situations of high inflation, the policy maker might accept an increase in unemployment to bring down the inflation rate.