According to the Phillips curve, inflation depends on expected inflation because:
A) the real interest rate depends on the expected rate of inflation.
B) the central bank sets its target inflation rate based on the expected rate of inflation.
C) the natural level of output depends on the expected rate of inflation.
D) when some firms set prices in advance, expected inflation influences future prices.

Question

Quizplus · Accepted Answer

The Phillips curve suggests that there is an inverse relationship between unemployment and inflation, but this relationship is affected by expected inflation. When firms set prices in advance, expected inflation can influence their pricing decisions, which in turn can affect future inflation rates. Therefore, expected inflation is an important factor in determining actual inflation according to the Phillips curve.

According to the Phillips Curve, Inflation Depends on Expected Inflation