According to the short-run Phillips curve, an expansionary fiscal policy will result inElimination ToolSelect one answerAa decrease in the unemployment rate as a result of the money supply increasing.Ban increase in the inflation rate and a decrease in the unemployment rate.Can increase in both the inflation rate and the unemployment rate.Da decrease in the inflation rate and an increase in the unemployment rate.Ea decrease in both unemployment and prices.
Question
According to the short-run Phillips curve, an expansionary fiscal policy will result inElimination ToolSelect one answerAa decrease in the unemployment rate as a result of the money supply increasing.Ban increase in the inflation rate and a decrease in the unemployment rate.Can increase in both the inflation rate and the unemployment rate.Da decrease in the inflation rate and an increase in the unemployment rate.Ea decrease in both unemployment and prices.
Solution
The correct answer is B: an increase in the inflation rate and a decrease in the unemployment rate.
Here's why:
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The short-run Phillips curve illustrates the inverse relationship between inflation and unemployment in an economy. This means that when inflation is high, unemployment is low and vice versa.
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Expansionary fiscal policy involves increasing government spending or decreasing taxes to stimulate economic growth. This leads to an increase in aggregate demand.
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As aggregate demand increases, businesses respond by increasing production to meet the higher demand. This leads to an increase in hiring, which reduces the unemployment rate.
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However, the increase in aggregate demand also puts upward pressure on prices, leading to an increase in the inflation rate.
So, according to the short-run Phillips curve, an expansionary fiscal policy will result in an increase in the inflation rate and a decrease in the unemployment rate.
Similar Questions
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Show in the AS-AD model why an expansionary fiscal policy cannot apparently reduce the natural rate of unemployment
According to the Phillips curve, there is a trade-off between inflation and unemployment in the short run.Question 1Answera.Trueb.False
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