Suppose the expected inflation rate is 12 percent and the unemployment rate is 5 percent. If the expected inflation rate increases to 13 percent,
A) the short- run Phillips curve will shift downward.
B) there will be a movement along the short- run Phillips curve.
C) the natural unemployment rate will rise.
D) the short- run Phillips curve will shift upward.

Question

Quizplus · Accepted Answer

According to the Phillips curve theory, there is an inverse relationship between inflation and unemployment in the short run. An increase in expected inflation rate means that there will be higher inflationary expectations in the economy, causing firms to increase prices and thereby increasing inflation. This will cause the short-run Phillips curve to shift upward as the unemployment rate will have to increase to maintain the same level of inflation. Therefore, the correct choice is D - the short- run Phillips curve will shift upward.

Suppose the Expected Inflation Rate Is 12 Percent and the Unemployment