If a central bank had to give up its discretion and had to follow a rule that required it to keep inflation low, how would the Phillips curve shift?
A) The short-run Phillips curve would shift up.
B) The short-run Phillips curve would shift down.
C) The long-run Phillips curve would shift right.
D) The long-run Phillips curve would shift left.

Question

Quizplus · Accepted Answer

If a central bank had to follow a rule to keep inflation low, it would likely adopt a more contractionary monetary policy, leading to higher interest rates and reduced aggregate demand. This would cause the short-run Phillips curve to shift downward, indicating that the trade-off between unemployment and inflation has become less favorable. However, the long-run Phillips curve would remain unchanged, as inflation expectations would adjust to the new policy regime, resulting in a corresponding shift in the natural rate of unemployment.

If a Central Bank Had to Give Up Its Discretion