An increase in the expected rate of inflation:
A) shifts the short-run Phillips curve down.
B) shifts the short-run Phillips curve up.
C) moves the economy along the short-run Phillips curve to higher rates of inflation.
D) moves the economy along the short-run Phillips curve to higher rates on unemployment.

Question

Quizplus · Accepted Answer

An increase in the expected rate of inflation leads to an upward shift in the short-run Phillips curve, as increasing inflation expectations imply that workers demand higher wages to compensate for the expected loss in purchasing power of their wages. This results in higher production costs for firms and increases in the price level, leading to higher inflation rates at any given level of unemployment.

An Increase in the Expected Rate of Inflation