The figure below reflects the inverse relationship between the inflation rate and the unemployment rate. If the economy started near point b, and government purchases increased, we would expect the economy in the short run to move to _____.

A) point a
B) point e
C) point c
D) point d
E) a point to the right of point b

Question

The figure below reflects the inverse relationship between the inflation rate and the unemployment rate. If the economy started near point b, and government purchases increased, we would expect the economy in the short run to move to _____.

A) point a 
B) point e 
C) point c 
D) point d 
E) a point to the right of point b

Quizplus · Accepted Answer

If government purchases increase, this would shift the aggregate demand curve to the right. As a result, the economy would experience an increase in both the price level and the level of output. This would cause the economy to move from point b to a point to the right of b on the downward sloping line, which represents the short run Phillips curve. The new point would be at a lower unemployment rate but a higher inflation rate, which would be consistent with moving to point c.

The Figure Below Reflects the Inverse Relationship Between the Inflation