Chapter 34, Problem 1CYU

To determine

The reason for a decrease in aggregate demand causes a movement along the short-run Philips curve.

Explanation of Solution

The Philips curve on the graph represents the inflation and unemployment relationship at different rates which depict there is a negative or inverse relationship or trade-off between these two components (inflation and unemployment). It means if there is a decrease in aggregate demand along the Philips curve then there is an impact on unemployment and inflation. A decrease in aggregate demand would occur in the Philip curve due to an increase in unemployment but a decrease in inflation. This curve would slope downward which may shift after a certain period of time.

When there is a decrease in inflation in the economy but a higher rate of unemployment then the aggregate demand in the short-run Philips curve would fall. It happens because even if the prices of goods are low but fewer people are engaged in employment which decreases their level of consumption and therefore the aggregate demand would decrease.

Economics Concept Introduction

Introduction: An aggregate demand refers to the total demand for goods and services at different price levels (aggregated) in the economy. In simple words, it is the total quantity which is demanded by customers at different prices in the market.

The price level is the average current price of goods and services in the economy that are produced in a particular interval.