If people believe that the central bank is going to reduce inflation

Question

Quizplus · Accepted Answer

If people believe that the central bank is going to reduce inflation, they will anticipate lower inflation rates in the future, which will decrease inflation expectations, lower nominal wages, and reduce the cost of production. As a result, the short-run Phillips curve shifts left, with lower inflation rates for a given level of unemployment. Moreover, the sacrifice ratio will fall, as the reduction in inflation rates requires lower costs, shorter periods of unemployment, and lower costs of adjusting to lower inflation expectations.

If People Believe That the Central Bank Is Going to Reduce