How will a favourable supply shock shift the short-run Phillips curve, and how does unemployment change?
A) It will shift the short-run Phillips curve right, and unemployment will rise.
B) It will shift the short-run Phillips curve right, and unemployment will fall.
C) It will shift the short-run Phillips curve left, and unemployment will rise.
D) It will shift the short-run Phillips curve left, and unemployment will fall.

Question

Quizplus · Accepted Answer

A favourable supply shock will increase the production capacity and decrease the cost of production, which leads to an increase in aggregate supply. This will shift the short-run Phillips curve to the left. This means that at any given inflation rate, the unemployment rate will be lower than before. Therefore, unemployment will fall.

How Will a Favourable Supply Shock Shift the Short-Run Phillips