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Chapter 25: Q.5 (page 622)

How would a decrease in energy prices affect the Phillips curve?

Short Answer

Expert verified

A decrease in energy prices shift the Phillips curve down toward the origin

Step by step solution

01

Concept introduction

A Phillips curve shows the tradeoff between unemployment and expansion in an economy. There are mainly two factors that cause the Phillips curve to shift. The first is supply shocks, The second is changes in people’s expectations about inflation.

02

Step 2:Explanation

A diminishing in energy prices, a positive supply shock, would cause the AS curve to move out to the right side, yielding all the more genuine GDP at a lower cost level. This would move the Phillips curve down toward the origin, meaning the economy would encounter lower unemployment and a lower rate of inflation.

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