What concept illustrates the inverse relationship between the rate of unemployment and the rate of inflation, suggesting a trade-off?

The correct answer is the Phillips curve, which is a macroeconomic concept that depicts an inverse relationship between unemployment and inflation. This curve suggests that when unemployment is low, inflation tends to be high because a tighter labor market can lead to wage increases, which businesses may pass on to consumers in the form of higher prices. Conversely, when unemployment is high, inflation tends to decrease due to reduced consumer spending and weaker wage growth.

This relationship indicates a trade-off that policymakers might face when trying to manage economic conditions. For example, employing expansionary monetary policies to reduce unemployment could lead to higher inflation, while contractionary policies aimed at controlling inflation could lead to higher unemployment.

The other options do not capture this specific relationship. Aggregate supply focuses on the total output firms are willing to produce at different price levels, but it does not address the trade-off between inflation and unemployment. The demand curve illustrates the relationship between quantity demanded and price at various price levels, which is a different concept. Lastly, a supply shock refers to a sudden and unexpected event that temporarily increases or decreases supply, affecting prices but not directly relating to the unemployment-inflation trade-off depicted by the Phillips curve.