Question:
Consider a short-run Phillips curve with a constant expected rate of inflation. If the aggregate demand decreases unexpectedly and the labour force remains the same, then what will happen to aggregate price and unemployment rate?
Consider a short-run Phillips curve with a constant expected rate of inflation. If the aggregate demand decreases unexpectedly and the labour force remains the same, then what will happen to aggregate price and unemployment rate?
Updated On: Feb 10, 2025
- Aggregate price rises and unemployment rate falls
- Aggregate price falls and unemployment rate rises
- Aggregate price rises and unemployment rate rises
- Aggregate price falls and unemployment rate falls
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The Correct Option is B
Solution and Explanation
In the short-run Phillips curve, there is a trade-off between inflation and unemployment. A de-
crease in aggregate demand typically leads to a lower inflation rate and a higher unemployment
rate as output decreases and the economy moves away from full employment.
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