According to the Phillips curve presented in the text, a negative macroeconomic shock:
A) increases the rate of inflation.
B) decreases the rate of inflation.
C) has no effect on the rate of inflation.
D) has a negative effect on the unemployment rate.
E) has a positive effect on the unemployment rate.

Question

Quizplus · Accepted Answer

According to the Phillips curve presented in the text, there is an inverse relationship between unemployment and inflation. When unemployment is low, inflation tends to be high, and when unemployment is high, inflation tends to be low. Therefore, a negative macroeconomic shock, such as a decrease in aggregate demand or an increase in oil prices, would lead to an increase in unemployment and a decrease in aggregate output. This, in turn, would lead to a decrease in inflation or a deflationary pressure. Therefore, the best choice is B, which says that a negative macroeconomic shock decreases the rate of inflation.

According to the Phillips Curve Presented in the Text, a Negative