Question

Suppose that commodity prices across the economy begin to fall and consumers and firms begin to expect a lower rate of future inflation. What do we expect to happen to the SRAS curve and short‐run Phillips curve?A. The SRAS curve will shift to the left, and the short‐run Phillips curve will shift downward. B. The SRAS curve will shift to the right, and the short‐run Phillips curve will shift downward. C. The SRAS curve will shift to the left, and the short‐run Phillips curve will shift upward. D. The SRAS curve will shift to the right, and the short‐run Phillips curve will shift upward. E. The LRAS curve will shift to the right, and the short‐run Phillips curve will shift upward

Answer 1

Answer:

B) The SRAS curve will shift to the right, and the short‐run Phillips curve will shift downward.

Explanation:

When the price of key inputs decreases, then the short-run aggregate supply (SRAS) curve shifts to the right, generally resulting in higher production levels (higher supply) due to lower production costs. On the other hand, when the price of key inputs increases, then the SRAS curve shifts to the left.

When inflation expectations decrease or SRAS curve shifts to the right, the short-run Phillips curve shifts to the left.