What does a decrease in money supply do to the Phillips curve?
An unexpected decrease in the money supply leads to unexpectedly lower prices. This means that the unemployment rate rises and the economy moves from point A to point D. When price expectations are adjusted so that they are equal to actual prices, the short-run Phillips curve shifts to p 3.
What happens to short-run Phillips curve when money supply increases?
The Phillips curve shows the relationship between inflation and unemployment. In the short-run, inflation and unemployment are inversely related; as one quantity increases, the other decreases.
What happens when money supply increases?
An increase in the supply of money typically lowers interest rates, which in turn, generates more investment and puts more money in the hands of consumers, thereby stimulating spending. Businesses respond by ordering more raw materials and increasing production.
What causes the Phillips curve to shift to the left?
For example, if frictional unemployment decreases because job matching abilities improve, then the long-run Phillips curve will shift to the left (because the natural rate of unemployment decreases).
What happens to unemployment if money supply increases?
In general, we can conclude that an increase in the money supply will raise the domestic price level to a larger degree in the long run, thus lowering the unemployment rate of labor and capital.
How does money illusion help to explain the trade off shown by the Phillips curve?
Money illusion helps to sustain that theory. It argues that employees seldom demand an increase in wages to compensate for inflation, making it easier for firms to hire staff on the cheap. Still, money illusion doesn’t adequately account for the mechanism at work in the Phillips curve.
How does an increase in aggregate supply affect the Phillips curve?
Aggregate Supply in the Short and Long Run. The AD/AS Model shows the short-run relationship between price level and employment. As price level rises, employment increases (point A to point B on AS curve). The Phillips curve shows the short-run relationship between inflation and unemployment.
What does an increase in aggregate supply do to the Phillips curve?
Improvements in technology lead to a leftward shift in the short run Phillips Curve. Increases in aggregate supply like these will shift the short run Phillips Curve to the left so that less inflation is seen at each unemployment rate.
What causes increase in money supply?
Money supply can rise if Government sells bonds or bills to the non-banking sector. If the public buys anything from the government they will reduce their deposits in banks; there will be no expansion in the money supply.
How does the government increase money supply?
The Fed can increase the money supply by lowering the reserve requirements for banks, which allows them to lend more money. Conversely, by raising the banks’ reserve requirements, the Fed can decrease the size of the money supply.
How does aggregate supply affect Phillips curve?
How does increased government spending affect the Phillips curve?
A rise in government spending represents an increase in aggregate demand, so it moves the economy along the short-run Phillips curve. The economy moves from point A to point B, with a decline in the unemployment rate and an increase in the inflation rate.