Chp. 17 - Chp. 17 - The Phillips Curve in the Short and...

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Chp. 17 - The Phillips Curve in the Short and Long Run An increase in aggregate demand increases the quantity of output, which decreases the unemployment rate. o An increase in aggregate demand also increases the price level, leading to an increase in inflation. Therefore, an increase in aggregate demand, or a rightward shift of the aggregate demand curve, is responsible for an upward movement along the short-run Phillips curve. The long-run Phillips curve illustrates that the economy always returns to the natural rate of unemployment. (Vertical unemployment rate) o Possible relationship between the unemployment rate and inflation rate Monetary policy has no long-run effect on such real variables as the quantity of output or the unemployment rate. o Although a decrease in the money supply will reduce output in the short run, the economy eventually returns to its natural rate of output and unemployment. The lasting effect of the contractionary monetary policy is reduction of the inflation
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Chp. 17 - Chp. 17 - The Phillips Curve in the Short and...

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