How does the short-run Phillips curve reflect an increase in the price of oil such as occurred in the early 1970s?
A) as a leftward shift in the short-run Phillips curve
B) as a rightward shift in the short-run Phillips curve
C) as a downward movement along the short-run Phillips curve
D) as an upward movement along the short-run Phillips curve

Question

Quizplus · Accepted Answer

An increase in the price of oil causes an increase in the cost of production and therefore increases firms' costs, leading to a decrease in aggregate supply. This decrease in aggregate supply causes a rightward shift in the short-run aggregate supply curve, which in turn causes a rightward shift in the short-run Phillips curve. This means that for any given level of unemployment, the rate of inflation will be higher than it was before the increase in oil prices.

How Does the Short-Run Phillips Curve Reflect an Increase in the Price