Question
Macroeconomics Question on Inflation and unemployment
Consider a short-run Phillips curve with a constant expected rate of inflation. If the aggregate demand decreases unexpectedly and the labour force remains the same, then what will happen to aggregate price and unemployment rate?
A
Aggregate price rises and unemployment rate falls
B
Aggregate price falls and unemployment rate rises
C
Aggregate price rises and unemployment rate rises
D
Aggregate price falls and unemployment rate falls
Answer
Aggregate price falls and unemployment rate rises
Explanation
Solution
The correct answer is (B): Aggregate price falls and unemployment rate rises