Question

Answer each of the following questions assuming the economy is experiencing a negative output gap because of the demand shock.

a. In the short-run inflation and unemployment are (select one) (both decreasing, both increasing, increasing and decreasing respectively, decreasing and increasing respectively)
b. This can be shown as a (select one) an upward movement along the short-run Phillips curve, an upward shift of the short-run Phillips curve, a downward movement along the short-run Phillips curve, a downward shift of the short-run Phillips curve

Answer 1

In the short-run, during a negative output gap caused by a demand shock, inflation and unemployment both increase. This is represented by an upward shift of the short-run Phillips curve.

Step-by-step explanation:

In the short-run, when the economy is experiencing a negative output gap due to a demand shock, inflation and unemployment are both increasing. This is because when demand decreases, businesses reduce their production, leading to lay-offs and higher unemployment. However, prices may still rise due to factors like higher production costs or reduced supply.

This can be shown as an upward shift of the short-run Phillips curve. The Phillips curve represents the trade-off between inflation and unemployment. When there is a negative output gap, the curve shifts upwards, indicating higher inflation and unemployment rates.

Answer 2

In the short-run, when the economy is experiencing a negative output gap due to a demand shock, both inflation and unemployment tend to increase. This is shown as an upward movement along the short-run Phillips curve.

Step-by-step explanation:

a. In the short run, inflation and unemployment are both increasing.

In the short-run, when the economy is experiencing a negative output gap due to a demand shock, both inflation and unemployment tend to increase. This is because the decrease in aggregate demand leads to a decrease in economic activity and reduced production, causing businesses to lay off workers, which increases unemployment. At the same time, with lower demand, businesses may lower prices to attract customers, resulting in inflation.

b. This can be shown as an upward movement along the short-run Phillips curve.

The short-run Phillips curve represents the inverse relationship between inflation and unemployment. When the economy is experiencing a negative output gap, the Phillips curve shifts upwards, indicating that higher levels of inflation are associated with higher levels of unemployment. This is shown as an upward movement along the short-run Phillips curve, as both inflation and unemployment increase.