Suppose an economy experiences a permanent increase in its expected inflation rate. As a result, there is
A) a downward shift of the short-run Phillips curve.
B) a downward movement along the short-run Phillips curve.
C) no change at all to the short-run Phillips curve.
D) an upward movement along the short-run Phillips curve.
E) an upward shift of the short-run Phillips curve.

Question

Quizplus · Accepted Answer

An increase in the expected inflation rate shifts the short-run Phillips curve upward because it reflects higher inflation expectations being built into wage and price setting, leading to a higher rate of inflation at every level of unemployment.

Suppose an Economy Experiences a Permanent Increase in Its Expected