Question

If Congress engages in contractionary fiscal policy, we can expect that a. the short-run Phillips curve...

If Congress engages in contractionary fiscal policy, we can expect that

a. the short-run Phillips curve will shift left.

b. the short-run Phillips curve will shift right.

c. the long-run Phillips curve will shift right.

d. there will be a movement to the right along the short-run Phillips curve.

e. there will be a movement to the left along the short-run Phillips curve.

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Answer #1

Answer : The answer is option a.

Contractionary fiscal policy decrease the aggregate demand. As a result, the price level fall and output level also decrease in short run. If output level decrease then unemployment increase. Short run Philips curve shows the inverse relationship between inflation and unemployment rate. So, for contractionary fiscal policy the short run Philips curve shift to leftward. Hence except option a other options are not correct. Therefore, option a is the correct answer.

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