Question

Rare earth metals are used in the production of many of the personal electronic devices you use every day. Suppose there is an unexpected decrease in the price of rare earth metals. a. The decrease in price of rare earth metals will lead to negative cost-push inflation. demand-pull inflation. an increase in expected inflation. negative demand-pull inflation. b. Illustrate the effect of the decrease in the price of rare earth metals by making the appropriate adjustments to the Phillips curve.

Answer 1

Answer:

a. negative cost-push inflation

b. Phillips Curve will shift right

Explanation:

a. Cost push inflation occurs when the costs of inputs such as wages and material costs increases. This leads to an increase in prices because producers will have to increase prices to make a profit.

In this scenario, material prices dropped instead of increasing. A negative cost-push inflation will therefore happen.

b. This will lead to a shift right in the Phillips curve to reflect that inflation has fallen. It will increase the output gap between Potential and Actual GDP because a lower inflation means more unemployment which means the economy is shrinking.

The black dot will shift right to (0, -2)