A difference between the inflation-expectations-augmented Phillips curve and the Phillips curve that is based on rational expectations is that
A)in the latter people never make incorrect forecasts
B)in the latter monetary policy changes cannot affect the rate of inflation
C)in the former a change in monetary policy causes an immediate shift in the Phillips curve
D)in the former expected inflation is always equal to actual inflation
E)none of the above

Question

Quizplus · Accepted Answer

The inflation-expectations-augmented Phillips curve and the Phillips curve based on rational expectations differ in how they incorporate expectations, but none of the provided options accurately describe these differences. In the rational expectations framework, people can still make incorrect forecasts due to unexpected shocks, monetary policy changes can affect inflation (especially in the short run), and expected inflation may not always equal actual inflation.

A Difference Between the Inflation-Expectations-Augmented Phillips Curve and the Phillips