Question
Which of the following will cause a movement from point X to point Y along the short-run Phillips curve (SRPC)that is shown in the graph above? A An increase in the expected inflation rate B An increase in the policy rate C An increase in government spending D An increase in input costs E An increase in income taxes
Answer
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Kian
Veteran · Tutor for 10 years
Answer
The Phillips curve represents the inverse relationship between the rate of inflation and the unemployment rate. A movement along the short-run Phillips curve (SRPC) implies that there is a change in the level of inflation and unemployment without the curve itself shifting.Let's analyze each option:(A) An increase in the expected inflation rate would typically shift the SRPC upwards because workers and firms would adjust their expectations and demand higher wages/prices, leading to higher inflation at every level of unemployment. This would not cause a movement along the curve but a shift of the curve itself.(B) An increase in the policy rate, which is usually the interest rate set by the central bank, would lead to tighter monetary policy. This would likely reduce inflation and increase unemployment as borrowing becomes more expensive, slowing down economic activity. This could indeed cause a movement from a lower point on the SRPC with higher inflation and lower unemployment (point X) to a higher point with lower inflation and higher unemployment (point Y).(C) An increase in government spending is a fiscal policy tool that would typically increase aggregate demand, leading to lower unemployment and higher inflation. This would not cause a movement from X to Y along the SRPC; instead, it would likely cause a movement from Y to X.(D) An increase in input costs, such as raw materials or wages, would lead to cost-push inflation, which could shift the SRPC upwards as firms pass on higher costs to consumers in the form of higher prices. This would not result in a movement along the SRPC but rather a shift of the SRPC.(E) An increase in income taxes would decrease disposable income, reduce consumption, and lower aggregate demand. This could lead to higher unemployment and lower inflation, which could cause a movement from point X to point Y along the SRPC.Based on the analysis, the correct answer is:(B) An increase in the policy rateThis would cause a movement from point X (lower unemployment and higher inflation) to point Y (higher unemployment and lower inflation) along the SRPC.