The short-run Phillips curve is ________ curve along which an ...

[mspears3]

The short-run Phillips curve is ________ curve along which an increase in the unemployment rate is associated with ________ in the inflation rate.
 
  A) a downward sloping; a decrease
  B) a vertical; no change
  C) a downward sloping; no change
  D) an upward sloping; an increase
  E) a horizontal; no change

Question 2

Explain why the expenditure multiplier is greater than 1.
 
  What will be an ideal response?

[Ahnyah]

Answer to Question 1

A

Answer to Question 2

The expenditure multiplier is greater than 1 because increases in real GDP induce further increases in expenditure. For instance, suppose Intel spends 500 million building a new factory. As a result, the disposable income of the workers constructing the factory increases. With the increase in their disposable income, these workers increase their consumption expenditure. Perhaps they all purchase new Ford SUVs. Ford must employ additional workers to build these SUVs, and so these workers' incomes increase. Possibly the Ford workers all buy new stoves. Hence the initial increase in Intel's investment has induced additional consumption expenditure upon SUVs and stoves. And the process won't stop with the stoves because the workers who make the stoves will increase their consumption expenditure. All of the added consumption expenditure makes the expenditure multiplier greater than 1.