In the Basic New Keynesian model, the Phillips curve specifies that, when the anticipated future rate of inflation increases, inflation

Question

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According to the Basic New Keynesian model, the Phillips curve is not vertical in the short run, meaning that there is a trade-off between inflation and unemployment. When the anticipated future rate of inflation increases, there is a downward pressure on real wages, leading to higher aggregate demand and output in the short run. However, because firms adjust their prices according to the expected future rate of inflation, inflation will not increase one-for-one with the anticipated increase. Instead, inflation will increase less than one-for-one, hence the answer is A.

In the Basic New Keynesian Model, the Phillips Curve Specifies