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    Question

    An economy is hit by a cost-push shock due to a sharp

    rise in input prices, resulting in higher inflation and rising unemployment in the short run. How does this affect the short run Phillips Curve?
    A It shifts rightward, indicating a deterioration in the inflation–unemployment trade-off Correct Answer Incorrect Answer
    B It shifts leftward, reflecting lower inflation at each level of unemployment Correct Answer Incorrect Answer
    C It remains unchanged as the shock affects only output Correct Answer Incorrect Answer
    D The economy moves downward along the existing curve Correct Answer Incorrect Answer
    E The curve becomes vertical immediately Correct Answer Incorrect Answer

    Solution

    A negative supply shock (like rising oil prices) increases inflation while reducing output, leading to higher unemployment and inflation simultaneously. The Phillips Curve shifts rightward, showing a worse inflation–unemployment trade-off.

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