The short-run Phillips curve relationship indicates that
A) only an anticipated change in aggregate demand affects the inflation rate or the unemployment rate.
B) an unanticipated increase in aggregate demand raises the inflation rate but lowers the unemployment rate.
C) an unanticipated increase in aggregate demand lowers the inflation rate but raises the unemployment rate.
D) an unanticipated increase in aggregate demand raises both the inflation rate and the unemployment rate.

Question

Quizplus · Accepted Answer

The short-run Phillips curve relationship states that there is an inverse relationship between unemployment and inflation in the short run. An unanticipated increase in aggregate demand, such as a sudden increase in consumer spending, results in higher prices and increased production as firms respond to increased demand. This increase in production requires more labor, resulting in a decrease in unemployment. Therefore, an unanticipated increase in aggregate demand causes an increase in the inflation rate and a decrease in the unemployment rate.

The Short-Run Phillips Curve Relationship Indicates That