Which economic theory suggests that higher levels of employment can lead to higher inflation rates?

The Phillips curve is a significant economic theory that illustrates the inverse relationship between inflation and unemployment in an economy. According to this theory, when unemployment is low, there tends to be upward pressure on wages because employers compete for a smaller pool of available workers. As wages rise, businesses may pass these costs onto consumers in the form of higher prices, thereby leading to an increase in the inflation rate. Consequently, the Phillips curve suggests that higher levels of employment, and thus lower unemployment rates, can lead to higher inflation.

In contrast, other economic theories, such as classical and Keynesian theories, address different aspects of employment and inflation dynamics. Classical theory emphasizes long-term growth and the idea that economies operate efficiently at full employment, often neglecting the short-term trade-offs. Keynesian theory recognizes the role of aggregate demand in driving employment and inflation but does not specifically delineate a direct relationship like the Phillips curve does. Monetarist theory focuses on the role of money supply in influencing inflation, rather than the relationship between employment levels and inflation rates. Therefore, the Phillips curve is the correct choice as it directly connects rising employment to rising inflation rates based on observed economic trends.