Suppose people in countries that have had persistently high inflation are sceptical about efforts to reduce inflation. What will happen to the short-run Phillips curve and the sacrifice ratio?
A) The short-run Phillips curve remains to the left, and the sacrifice ratio will be low.
B) The short-run Phillips curve remains to the left, and the sacrifice ratio will be high.
C) The short-run Phillips curve remains to the right, and the sacrifice ratio will be low.
D) The short-run Phillips curve remains to the right, and the sacrifice ratio will be high.

Question

Quizplus · Accepted Answer

When people are skeptical about efforts to reduce inflation, they are less likely to adjust their inflation expectations downward. This skepticism can make disinflation efforts more difficult and costly, leading to a higher sacrifice ratio. The short-run Phillips curve remains to the right because inflation expectations are slow to adjust, making it more challenging to reduce inflation without significant economic costs.

Suppose People in Countries That Have Had Persistently High Inflation