The Phillips curve and the short-run aggregate supply curve are closely related, yet one slopes downward and the other slopes upward. Discuss
The Phillips curve shows the relation between inflation and unemployment. The short-run aggregate-supply curve shows the relation between the price level and output. When aggregate demand increases, the price level and output rise. The rising price level means that inflation has increased. The rising level of output means that firms will hire more workers so that the unemployment rate falls. Thus, the model implies that inflation and unemployment are inversely related as the Phillips curve indicates. Real GDP and the unemployment rate move in the opposite direction. So it is consistent to have an upward sloping aggregate supply curve with output on the horizontal axis and a downward sloping Phillips curve with unemployment on the horizontal axis.
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As the number of firms in a market decreases, the supply curve will shift to the left and the equilibrium price will fall
Indicate whether the statement is true or false
If a government increases its budget deficit, then interest rates
a. rise and the real exchange rate appreciates. b. fall and the real exchange rate depreciates. c. rise and the real exchange rate depreciates. d. fall and the real exchange rate appreciates.