If firms and workers have rational expectations, including knowledge of the policy being used by the Bank of Canada, the short-run Phillips curve will be

Question

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If firms and workers have rational expectations and knowledge of the policy being used by the Bank of Canada, they will anticipate any changes in monetary policy and adjust their behavior accordingly. This means that the short-run Phillips curve will be vertical, indicating that there is no trade-off between inflation and unemployment in the short run. This occurs because any attempt by the central bank to reduce unemployment through expansionary monetary policy is anticipated by workers and firms, leading to higher inflation without any significant reduction in unemployment.

If Firms and Workers Have Rational Expectations, Including Knowledge of the Policy