Short-run Philips Curve and Money Supply
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Loading ...I see this question in other forum. I think it is worth trying. Consider an economy operating at full employment, but with a high inflation rate. Based on the short-run Phillips curve, an unexpected decrease in money supply growth is likely to result in the following changes in the unemployment rate and inflation rate:
Unemployment rate Inflation rate
A) Increase Fall to the desired rate
B) Remain unchanged Fall to the desired rate
C) Increase Remain above the desired rate
Hm… Is it C?
decreasing money supply will dampen the economy growth. so it must be either A or C. But for inflation rate, I guess since when there is no sudden decrease of money supply, the SR philips curve will shit to right resulting in above desired inflation rate; now with this sudden change, although it is targeted to shift the inflation to desired rate, but it is offseted somehow by the shifting of SR curve? So it is C… Not sure if correct…
I say it’s A.
A decrease in money supply will definitely increase unemployment. no argument about that.
..and since the Philips curve tells us about the negative relationship between unemployment and inflation, then inflation will definitely fall to its desired state.
Why a decrease in money supply will definitely increase unemployment?
Decrease in money supply will reduce the growth of the economy, so unemployment will be higher.
uh… if there is full employment and inflation, how is the money supply decreasing?