Question

Consider the following statements:
1. Phillips Curve is an inverse relationship between the rate of unemployment and the rate of inflation in an economy.
2. Engel's law observes that as income rises, the proportion of income spent on food falls even if the actual expenditure on food rises.
Which of the statements given above is/are correct?

• A. Only 1
• B. Only 2
• C. Both 1 and 2
• D. Neither 1 nor 2

Answer 1

Answer: (C)

Both 1 and 2

Phillips curve states an inverse relationship between rate of unemployment and rate of inflation. As the economy grows, inflation is inevitable and in such a scenario rate of unemployment is lower as more jobs are created.

As per Engel's law, lower income households spend greater portion of their income on food while as the income rises, expenditure on luxury goods also increases and the percentage spent on food decreases.