If people correctly anticipate that inflation will fall by 1%, then
A)the short-run Phillips curve shifts right and unemployment is unchanged.
B)the short-run Phillips curve shifts right and unemployment rises.
C)the short-run Phillips curve shifts left and unemployment is unchanged.
D)the short-run Phillips curve would shift left and unemployment falls.

Question

Quizplus · Accepted Answer

The short-run Phillips curve represents the inverse relationship between inflation and unemployment. If people correctly anticipate a fall in inflation, it implies that inflationary expectations adjust downward. This adjustment can lead to a leftward shift in the short-run Phillips curve because lower inflation expectations can reduce wage and price pressures without changing the actual rate of unemployment, hence unemployment remains unchanged.

If People Correctly Anticipate That Inflation Will Fall by 1