Figure 12.1 -Refer to Figure 12.1..Suppose the economy is initially at full employment with real GDP equal to potential GDP,and the expected inflation rate equal to the actual inflation rate.If an economic shock causes the IS curve to shift from IS₁ to IS₂,this will A) push the economy down the Phillips curve, raising the inflation rate. B) push the economy up the Phillips curve, raising the inflation rate. C) push the economy down the Phillips curve, lowering the inflation rate. D) push the economy up the Phillips curve, lowering the inflation rate.

Question

Quizplus · Accepted Answer

In the short run, the shift of the IS curve from IS₁ to IS₂ will cause a movement along the Phillips curve from point A to point B, increasing the inflation rate and lowering the unemployment rate. This movement is upward along the Phillips curve, suggesting that the economy will experience higher inflation rates for any given unemployment rate. Therefore, the correct answer is B.

Figure 12.1 -Refer to Figure 12.1..Suppose the Economy Is Initially at Full