📚 Learning Guide
Aggregate Demand and Supply Shifts
hard

If aggregate demand increases while short-run aggregate supply remains constant, what is the likely effect on the Phillips curve?

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Learning Path
Learning Path

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Choose the Best Answer

A

Unemployment decreases and inflation increases

B

Unemployment increases and inflation decreases

C

Both unemployment and inflation remain constant

D

Unemployment decreases and inflation remains constant

Understanding the Answer

Let's break down why this is correct

Answer

When aggregate demand increases and short-run aggregate supply stays the same, it usually leads to higher prices and lower unemployment in the economy. This is because more people want to buy goods and services, so businesses respond by raising prices. As a result, on the Phillips curve, which shows the relationship between inflation and unemployment, we would see a movement along the curve towards higher inflation and lower unemployment. For example, if a new technology makes people want to buy more gadgets, businesses might raise prices due to increased demand, leading to a situation where we have both higher inflation and fewer people out of work. Overall, this shift illustrates the trade-off between inflation and unemployment in the short run.

Detailed Explanation

When demand goes up, businesses hire more workers to meet the demand. Other options are incorrect because This option suggests that more demand leads to fewer jobs, which is the opposite of what happens; This choice implies that changes in demand have no effect, which isn't true.

Key Concepts

Aggregate Demand
Short-Run Aggregate Supply
Phillips Curve
Topic

Aggregate Demand and Supply Shifts

Difficulty

hard level question

Cognitive Level

understand

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