776 PART TWELVE SHORT-RUN ECONOMIC FLUCTUATIONS This shift in aggregate supply is associated with a similar shift in the short-run Phillips curve, shown in panel (b). Because firms need fewer workers to produce the smaller output, employment falls and unemployment rises. Because the price level is higher, the inflation rate—the percentage change in the price level from the previous year—is also higher. Thus, the shift in aggregate supply leads to higher unemployment and higher inflation. The short-run tradeoff between inflation and unemployment shifts to the right from PC 1 to PC 2 . Confronted with an adverse shift in aggregate supply, policymakers face a dif-ficult choice between fighting inflation and fighting unemployment. If they con-tract aggregate demand to fight inflation, they will raise unemployment further. If they expand aggregate demand to fight unemployment, they will raise inflation further. In other words, policymakers face a less favorable tradeoff between infla-
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This note was uploaded on 08/01/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.