The short-run Phillips curve implied when all changes in aggregate demand are caused by changes in the money supply is
A)upward sloping.
B)downward sloping.
C)horizontal.
D)vertical.
E)None of the above

Question

Quizplus · Accepted Answer

In the short-run, changes in the money supply cause changes in aggregate demand which in turn affect the price level and employment. As the money supply increases, aggregate demand increases which results in an increase in employment and a rise in the price level. This implies a downward sloping Phillips curve, as there is a trade-off between inflation and unemployment in the short-run. As the economy approaches full employment, however, the Phillips curve becomes vertical, since any additional increases in aggregate demand can only lead to higher prices and not increased output or employment.

The Short-Run Phillips Curve Implied When All Changes in Aggregate