Expectations of higher inflation rates cause a leftward shift in the short-run aggregate supply curve and usher in a stagflation phase of the inflation-unemployment relationship.

Question

Quizplus · Accepted Answer

When inflation expectations increase, firms anticipate higher prices for their goods and services and therefore increase their prices. This results in a leftward shift of the short-run aggregate supply curve, leading to higher prices and lower output. Stagflation occurs when inflation increases but the economy remains stagnant or experiences high levels of unemployment, which is characteristic of the inflation-unemployment trade-off in the short-run.

Expectations of Higher Inflation Rates Cause a Leftward Shift in the Short-Run