If aggregate demand decreases, the
A) short-run Phillips curve shifts rightward.
B) short-run Phillips curve shifts leftward.
C) economy moves to a higher inflation rate along its short-run Phillips curve.
D) economy moves to a lower inflation rate along its short-run Phillips curve.
E) short-run Phillips curve does not shift nor is there a movement along it.

Question

Quizplus · Accepted Answer

If aggregate demand decreases, the economy moves to a lower inflation rate along its short-run Phillips curve. This is because the decrease in aggregate demand leads to a decrease in output and employment, which puts downward pressure on wages and prices, resulting in lower inflation. As a result, the short-run Phillips curve shifts downward, and the economy moves to a lower inflation rate along the curve.

If Aggregate Demand Decreases, the