Use the following to answer questions:
-(Figure: Expected Inflation and the Short-Run Phillips Curve) SRPC₀ is the Phillips curve with an expected inflation rate of zero; SRPC₂ is the Phillips curve with an expected inflation rate of 2%. Refer to Figure: Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an unemployment rate of 6%, no inflation, and no expectation of inflation. If the central bank increases the money supply such that aggregate demand shifts to the right and unemployment falls to 4%, then inflation will:

Question

Use the following to answer questions:

-(Figure: Expected Inflation and the Short-Run Phillips Curve) SRPC₀ is the Phillips curve with an expected inflation rate of zero; SRPC₂ is the Phillips curve with an expected inflation rate of 2%. Refer to Figure: Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an unemployment rate of 6%, no inflation, and no expectation of inflation. If the central bank increases the money supply such that aggregate demand shifts to the right and unemployment falls to 4%, then inflation will:

Quizplus · Accepted Answer

According to the Phillips curve, a decrease in unemployment leads to an increase in inflation. Since there is no expectation of inflation initially, the economy is on the SRPC₀ curve. When aggregate demand shifts to the right, unemployment falls to 4%, and the economy moves to the SRPC₂ curve, which is associated with an expected inflation rate of 2%. Therefore, inflation will rise to 2%.

Use the Following to Answer Questions