AP Macroeconomics Question 64: Answer and Explanation

Test Information

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Question: 64

2. Which of the following creates the trade-offdepicted by the Phillips curve?

  • A. A rightward shift in the aggregate supply curve
  • B. An increase in input costs that corresponds with an increase in unemployment
  • C. An increase in output that corresponds with a decrease in the price level
  • D. A leftward shift in the aggregate supply curve
  • E. A rightward shift in the aggregate demand curve

Correct Answer: E

Explanation:

E The Phillips curve depicts a trade-off between inflation and unemployment—when one increases, the other decreases. Shifts in the aggregate supply curve result in inflation and unemployment both increasing or both decreasing. An increase in input costs will shift AS to the left and increase the price level; the corresponding increase in unemployment creates a positive relationship between inflation and unemployment, not a trade-off. An increase in output decreases unemployment. When this is accompanied by a decrease in the price level, again no trade-off between inflation and unemployment results. It is a shift in the AD curve that causes inflation to increase and unemployment to decrease or vice versa.