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IAI Actuarial Core Principles · Business Economics · Business activity, unemployment and inflation

Which development is most likely to shift an economy's short-run Phillips curve to the right (a worse trade-off) in an economy like India's?

A sharp rise in imported crude oil prices shifts the short-run Phillips curve outward because it raises firms' costs and inflation at every level of unemployment. Lower expected inflation or better job matching would shift it inward, while a demand fall causes a movement along the curve.

  1. AA fall in expected inflation
  2. BA rise in the labour force participation of skilled workers
  3. CA sharp rise in imported crude oil prices raising firms' costsCorrect
  4. DA movement along the curve due to lower aggregate demand
  5. An improvement in labour market matching efficiency

Explanation

A supply shock such as higher oil prices raises costs and prices at any given unemployment rate, shifting the curve outwards. Lower expected inflation and better matching shift it inwards. Lower demand causes movement along the curve, not a shift.

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