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Phillips Curve and Supply Shocks quiz

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  • What is a supply shock in the context of aggregate supply?
    A supply shock is an unexpected event that affects a firm's production costs and shifts the aggregate supply curve, usually due to changes in input prices.
  • How does an increase in input prices, like gasoline, affect the short-run aggregate supply (SRAS) curve?
    An increase in input prices shifts the SRAS curve to the left, indicating reduced supply in the economy.
  • What happens to GDP and price levels when the SRAS curve shifts left due to a supply shock?
    GDP decreases and price levels increase, leading to lower output and higher inflation.
  • How does a supply shock impact unemployment in the short run?
    A supply shock increases unemployment because less GDP means fewer workers are needed to produce output.
  • What is the effect of a supply shock on inflation?
    A supply shock causes inflation to rise due to higher production costs and reduced supply.
  • How does the short-run Phillips curve respond to a supply shock?
    The short-run Phillips curve shifts to the right, showing higher inflation and higher unemployment at every level.
  • Why is a supply shock considered 'doubly bad' for the economy?
    It leads to both higher inflation and higher unemployment, making economic conditions worse.
  • What trade-off do policymakers face during a supply shock?
    Policymakers must choose between reducing inflation or unemployment, as improving one worsens the other.
  • What does a rightward shift in the short-run Phillips curve indicate?
    It indicates that at every level, both inflation and unemployment are higher than before.
  • How does a decrease in aggregate supply affect economic output?
    A decrease in aggregate supply reduces economic output, resulting in lower GDP.
  • What happens to the price level when aggregate supply decreases?
    The price level increases, leading to higher inflation.
  • How does a supply shock complicate achieving market equilibrium?
    It makes it harder to balance inflation and unemployment, as both worsen simultaneously.
  • What is the relationship between unemployment and GDP during a supply shock?
    As GDP decreases, unemployment increases because fewer workers are needed.
  • What is the main challenge for policymakers during a supply shock?
    They must address both rising inflation and unemployment, which are difficult to solve together.
  • How does the Phillips curve illustrate the trade-off between inflation and unemployment?
    The Phillips curve shows that efforts to reduce unemployment often increase inflation, and vice versa.