An adverse supply shock shifts the short-run Phillips curve right. If people raise their inflation expectations, the short-run Phillips curve shifts farther right.

Question

Quizplus · Accepted Answer

An adverse supply shock, such as a sudden increase in oil prices, typically reduces the quantity of goods and services that businesses can produce, leading to higher production costs and prices. This situation can shift the short-run Phillips curve to the right, indicating a higher rate of inflation for any given level of unemployment. If people then adjust their expectations upward and anticipate higher inflation in the future, this can further shift the short-run Phillips curve to the right, as workers demand higher wages to compensate for expected inflation, and businesses raise prices in anticipation of higher costs, reinforcing the inflationary process.

An Adverse Supply Shock Shifts the Short-Run Phillips Curve Right