How will a favourable supply shock shift the short-run Phillips curve and how does it change inflation?
A) It will shift the short-run Phillips curve right and raise inflation.
B) It will shift the short-run Phillips curve right and lower inflation.
C) It will shift the short-run Phillips curve left and raise inflation.
D) It will shift the short-run Phillips curve left and lower inflation.

Question

Quizplus · Accepted Answer

A favourable supply shock will increase the aggregate supply and reduce production costs, causing a leftward shift of the short-run Phillips curve. This will lead to lower inflation, as firms can produce more output without experiencing higher costs for inputs. Therefore, the correct choice is D, which states that the short-run Phillips curve will shift left and lower inflation.

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