Demand shocks move unemployment and inflation in
A) the same directions, as the Phillips Curve suggests.
B) opposite directions, as the Phillips Curve suggests.
C) the same directions, which is not what the Phillips Curve suggests.
D) opposite directions, which is not what the Phillips Curve suggests.
E) circles.

Question

Quizplus · Accepted Answer

According to the Phillips Curve, there is an inverse relationship between unemployment and inflation. A demand shock, such as an increase in consumer spending or government spending, can lead to both an increase in inflation and a decrease in unemployment in the short run. This is because the increase in demand for goods and services leads firms to increase production, which requires additional workers, thus reducing unemployment. However, in the long run, the increase in aggregate demand can lead to higher prices and wages, which can increase inflation and ultimately return unemployment to its natural rate. Therefore, demand shocks typically move unemployment and inflation in opposite directions.

Demand Shocks Move Unemployment and Inflation in