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Phillips Curve Exercise 1 a. A positive demand shock to the economy will have what effect...

Phillips Curve Exercise 1

a. A positive demand shock to the economy will have what effect in the short run?

An increase in inflation, but a decrease in real GDP
A decrease in both inflation and real GDP
An increase in both inflation and real GDP
A decrease in inflation, but an increase in real GDP

b. A negative demand shock to the economy will have what effect in the short run?

A decrease in both inflation and real GDP
A decrease in inflation, but an increase in real GDP
An increase in both inflation and real GDP
An increase in inflation, but a decrease in real GDP

c. The Phillips curve depicts what short-run relationship?

A direct relationship between inflation and real GDP
A direct relationship between inflation and unemployment
An inverse relationship between inflation and unemployment
An inverse relationship between inflation and real GDP

Expert Solution

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the solution of the above questions is:

a. A positive demand shock to the economy will have what effect in the short run?

An increase in both inflation and real GDP

Reason:

Demand Shock is surprising increases or decreases in the demand for good and services & lead to increase/decrease in prices due to the inelastic nature of the supply curve in the short-run.

Positive shock: it leads to an increase in the demand & increase in consumption in the short run in the economy.

It will increase economic activity & leads to a higher price of the economy is near full capacity, Inflation.

b. A negative demand shock to the economy will have what effect in the short run?

A decrease in both inflation and real GDP

Reason:

Negative shock: it leads to a decrease in the demand & decrease in consumption in the short run in the economy.

It will decrease economic activity & leads to an increase in unemployment and decrease inflation.

c. The Phillips curve depicts what short-run relationship?

An inverse relationship between inflation and unemployment

Rahul Sunny answered 2 years ago

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