A sudden monetary contraction moves the economy up a short-run Phillips curve, reducing unemployment and increasing inflation.

Question

Quizplus · Accepted Answer

A sudden monetary contraction reduces the money supply, which leads to higher interest rates and lower spending by consumers and businesses. This decrease in aggregate demand shifts the aggregate demand curve leftward, causing a decrease in output and employment. Therefore, the economy moves up along the short-run Phillips curve, increasing unemployment and decreasing inflation.

A Sudden Monetary Contraction Moves the Economy Up a Short-Run