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Question
Microeconomics
Posted about 1 year ago
Which of the following represents how a negative demand shock would impact the Phillips curve model?
Choose 1 answer:
(A)
(B)
(C)
(D)
(E)
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Answer from Sia
Posted about 1 year ago
Solution
a
Negative Demand Shock: A negative demand shock is a sudden decrease in the demand for goods and services in an economy. This can be caused by various factors such as a decrease in consumer confidence, higher interest rates, or a decrease in government spending
b
Short-Run Phillips Curve (SRPC): In the short run, a negative demand shock will shift the aggregate demand curve to the left, leading to lower output and higher unemployment. This movement along the SRPC will result in lower inflation and higher unemployment
c
Long-Run Phillips Curve (LRPC): In the long run, the economy will adjust back to the natural rate of unemployment, and the LRPC will remain vertical. The negative demand shock does not shift the LRPC but rather causes a movement along the curve
d
Graphical Representation: The correct graphical representation of a negative demand shock on the Phillips curve model would show a movement along the SRPC to a point with higher unemployment and lower inflation
Answer
(A)
Key Concept
Negative Demand Shock
Explanation
A negative demand shock causes a movement along the Short-Run Phillips Curve (SRPC) to a point with higher unemployment and lower inflation, without shifting the Long-Run Phillips Curve (LRPC).
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