Suppose that commodity prices across the economy begin to fall and consumers and firms begin to expect a lower rate of inflation. The SRAS curve will shift to the _____, and the short-run Phillips curve will shift _____.

Question

Quizplus · Accepted Answer

When commodity prices fall and expectations of inflation decrease, the cost of production decreases, leading to an increase in the short-run aggregate supply (SRAS) which shifts the SRAS curve to the right. Similarly, lower inflation expectations shift the short-run Phillips curve downward, reflecting lower inflation at each level of unemployment.

Suppose That Commodity Prices Across the Economy Begin to Fall