If people have rational expectations,but they are not always correct in their expectations,the expectation of a lower inflation rate will cause:
A) the short-run Phillips curve to become vertical.
B) the short-run Phillips curve to shift leftward.
C) a movement down along a short-run Phillips curve.
D) the short-run Phillips curve to shift rightward.

Question

Quizplus · Accepted Answer

If people have rational expectations but they are not always correct, their expectation of a lower inflation rate will cause them to anticipate and plan for a lower rate of inflation. This, in turn, will lead to lower wage and price increases in the short-run. This shifts the short-run Phillips curve leftward because there is a lower level of inflation for any given level of unemployment.

If People Have Rational Expectations,but They Are Not Always Correct