When the aggregate supply curve shifts adversely, what happens to the relationship shown in the Phillips curve?
A)It is reinforced, and made more applicable for policy.
B)It is destroyed, and no longer applies for policy.
C)It is unchanged, although the curve becomes less steep.
D)It is unchanged, although the curve shifts inward and to the left.

Question

Quizplus · Accepted Answer

When the aggregate supply curve shifts adversely, it means there is a decrease in the amount of goods and services that businesses are willing and/or able to supply at a given price level. This leads to an increase in the price level (inflation) and a decrease in real GDP. This shift in the aggregate supply curve destroys the relationship shown in the Phillips curve because there is no longer a negative correlation between unemployment and inflation. High inflation and high unemployment can coexist in this situation, which contradicts the Phillips curve's premise.

When the Aggregate Supply Curve Shifts Adversely, What Happens to the Relationship