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Phillips Curve Dynamics
easy

Which of the following statements accurately describe the implications of the Phillips Curve dynamics in the context of fiscal policy changes? Select all that apply.

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Choose the Best Answer

A

Increasing personal income taxes can lead to higher unemployment and lower inflation.

B

A leftward shift in aggregate demand typically results in a decrease in both inflation and unemployment.

C

The Phillips Curve suggests that there is a trade-off between inflation and unemployment in the short run.

D

A decrease in disposable income generally leads to increased consumption and economic growth.

Understanding the Answer

Let's break down why this is correct

Answer

The Phillips Curve shows the relationship between inflation and unemployment, suggesting that when unemployment is low, inflation tends to be high, and vice versa. When a government changes fiscal policy, like increasing spending or cutting taxes, it can stimulate the economy, leading to lower unemployment. As more people find jobs, they have more money to spend, which can push prices up and increase inflation. For example, if the government builds new roads, it creates jobs and puts more money in people's pockets, which may lead to higher prices for goods. Therefore, fiscal policy changes can impact both unemployment and inflation, illustrating the dynamics of the Phillips Curve.

Detailed Explanation

Other options are incorrect because Higher taxes usually mean people have less money to spend; When demand decreases, it usually causes higher unemployment and lower inflation.

Key Concepts

Phillips Curve Dynamics
Fiscal Policy Impact
Inflation and Unemployment Relationship
Topic

Phillips Curve Dynamics

Difficulty

easy level question

Cognitive Level

understand

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