Briefly discuss some of the short-term options the Phillips curve gives policy makers and provide examples of how at least two of these options might be used.

Question

What will be an ideal response?

Answer 1

Student responses will vary but should accurately exemplify some of the options the Phillips curve gives to policy makers. In the short-run, the Phillips curve offers policy makers a menu of alternatives. Expansionary and contractionary monetary and fiscal policy can change aggregate demand, triggering a movement along the short-run aggregate supply curve. These policies can also be represented as moving the economy along a Phillips curve. For example, an increase in the money supply, an increase in government purchases and/or a tax cut could cause an increase in aggregate demand and move the economy to a point on the Phillips curve with lower unemployment but higher inflation. A decrease in the money supply, reductions in government purchases and/or increases in taxes could move the economy to a point with lower inflation and higher unemployment.