According to the Phillips curve, in the short run, if policy makers choose an expansionary policy to lower the rate of unemployment ?
Correct answer: A. The economy will experience an increase in inflation
- A. The economy will experience an increase in inflation
- B. The economy will experience a decrease in inflation
- C. Inflation will be unaffected if price expectations are unchanging
- D. None of these answers
Explanation
In the short run, expansionary policy raises aggregate demand, increasing output and inflation while reducing unemployment. This inverse inflation-unemployment relationship is the short-run Phillips-curve trade-off.
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