The expectations-augmented Phillips curve suggests, among other things, that
A) an economy that perpetually runs actual GDP near potential GDP will enjoy stable and predictable rates of inflation in the absence of any outside shocks.
B) an economy that perpetually runs actual GDP in excess of potential GDP will suffer year after year of successively higher inflation.
C) an economy that is not willing to suffer recession will have to live with inflation unless it can lower inflationary expectations somehow.
D) all of the above.
E) none of the above.

Question

Quizplus · Accepted Answer

The expectations-augmented Phillips curve incorporates the role of inflationary expectations alongside the traditional Phillips curve concept that relates inflation and unemployment. It suggests that if an economy consistently operates at or near its potential GDP, inflation rates will remain stable barring external shocks (A). If an economy consistently operates above its potential GDP, it will experience progressively higher inflation rates (B), and avoiding recession at the cost of higher inflation can only be mitigated by reducing inflationary expectations (C). Therefore, all of the statements A, B, and C are correct interpretations of the expectations-augmented Phillips curve.

The Expectations-Augmented Phillips Curve Suggests, Among Other Things, That