Which of the following leads to a downward shift in the short-run Phillips curve?
A) People expected inflation to be 5 percent last year and now expect inflation to be 3 percent this year.
B) People expect the unemployment rate to increase.
C) The long-run Phillips curve shifts rightward.
D) Unexpected inflation increases.

Question

Quizplus · Accepted Answer

The short-run Phillips curve represents the inverse relationship between inflation and unemployment, assuming other factors remain constant. A downward shift in this curve implies that for any given rate of unemployment, the inflation rate is lower. Choice A, where people adjust their inflation expectations downward from 5 percent to 3 percent, directly leads to a lower inflation rate at each level of unemployment, hence a downward shift in the short-run Phillips curve. Expectations of inflation are a key determinant of actual inflation, as they influence wage-setting and price-setting behavior.

Which of the Following Leads to a Downward Shift in the Short-Run