Suppose an economy with high inflation decides to decrease the money supply growth rate. Which of the following best describes the results?
A) Initially unemployment rises. Eventually the short-run Phillips curve shifts right.
B) Initially unemployment rises. Eventually the short-run Phillips curve shifts left.
C) Initially unemployment falls. Eventually the short-run Phillips curve shifts right.
D) Initially unemployment falls. Eventually the short-run Phillips curve shifts left.

Question

Quizplus · Accepted Answer

When an economy with high inflation decides to decrease the money supply growth rate, it typically leads to higher interest rates and reduced spending in the short term. This can cause an increase in unemployment as businesses adjust to the decreased demand. Over time, as inflation expectations adjust downward, the short-run Phillips curve, which illustrates the trade-off between inflation and unemployment, shifts to the left, indicating lower inflation at each level of unemployment.

Suppose an Economy with High Inflation Decides to Decrease the Money