Question

g If the government implements a contractionary fiscal policy measure, but keeps monetary policy inactive, according the the short run Phillips Curve:Group of answer choicesactual inflation will increase and unemployment decrease.expected inflation will decline and unemployment will decline as well.actual inflation will decline and unemployment will increase.actual inflation will decline and unemployment will decline as well.

Answer 1

Answer: Actual inflation will decline and unemployment will increase

Explanation:

The Phillips Curve aims to show that there is an inverse relationship between Unemployment and Inflation and as inflation rises, unemployment decreases.

When the Government implements Contractionary Fiscal Policy it means that they reduce Government Spending which is a component of Aggregate Demand. Due to this reduction, the Aggregate Demand curve shifts to the left.  As it does so it will intersect with the Aggregate Supply curve at a smaller price level which will indicate a drop in Actual inflation.

This reduction in Aggregate Demand which is also GDP will be a reduction in Economic growth which will lead to a higher level of unemployment.