How does increased government spending affect the short run Phillips curve?
1 Answer
Mar 2, 2016
Government spending in the short run generally has no effect on the Phillips curve, as it does not affect employment or inflation.
Explanation:
If government spending comes from taxes, there is no overall increase in production, as it shifts spending from the private to the public sector. There is also no change in price inflation. However, if the spending comes from borrowing that is accommodated by a greater money supply, that increases price inflation.
