Given an expectations-augmented Phillips curve of the usual form and no outside price shocks, inflation matching expected inflation over the long term can be consistent with
A) actual GDP matching its potential over the long term.
B) actual GDP falling short of its potential over the long term.
C) actual GDP exceeding its potential over the long term.
D) a spiraling divergence of actual GDP away from its potential over the long term.
E) any of the above depending on circumstance.

Question

Quizplus · Accepted Answer

The expectations-augmented Phillips curve suggests that when inflation expectations are met over the long term, the economy is likely to be operating at its potential output. This is because the curve posits a trade-off between inflation and unemployment only in the short term, with no long-term trade-off once expectations are fully incorporated.

Given an Expectations-Augmented Phillips Curve of the Usual Form and No