If the Fed is able to permanently reduce the inflation rate,households will eventually lower their expectation of the inflation rate.Once that happens,the Phillips curve will shift ________,and the Fed can return output to potential GDP by ________ the real interest rate.
A) up; raising
B) up; lowering
C) down; raising
D) down; lowering

Question

Quizplus · Accepted Answer

If households lower their expectation of the inflation rate, the Phillips curve will shift down (as there is now less pressure for higher wages and prices). To return output to potential GDP, the Fed can lower the real interest rate, which increases spending and output. Therefore, the answer is down; lowering.

If the Fed Is Able to Permanently Reduce the Inflation