What does the Phillips Curve illustrate?

The Phillips Curve illustrates the inverse relationship between inflation and unemployment. This economic concept posits that when inflation rises, unemployment tends to fall, and conversely, when inflation decreases, unemployment tends to rise. This relationship suggests that policymakers can choose between higher inflation and lower unemployment or lower inflation and higher unemployment, at least in the short run.

Historically, the Phillips Curve was derived from empirical observation, indicating that wage inflation was linked to the rate of unemployment in the labor market. Over time, the relationship highlighted by the Phillips Curve has served as a crucial tool in economic policymaking, especially in understanding the trade-offs that central banks face when attempting to manage the economy's overall performance.

In contrast, other options refer to different economic relationships. The relationship between inflation and investment is not represented by the Phillips Curve directly, nor is there a direct relationship between unemployment and interest rates; instead, these factors interact in more complex ways. Additionally, the correlation of employment levels with economic growth pertains to broader economic performance and is distinct from the Phillips Curve focus on the specific trade-offs between inflation and unemployment.