The automatic adjustment mechanism that makes the economy move toward the long-run Phillips Curve is
A) expansionary ﬁscal or monetary policy.
B) inﬂation expectations and wage adjustments.
C) contractionary ﬁscal or monetary policy.
D) increases in productivity over time.

Question

Quizplus · Accepted Answer

In the long-run, inﬂation expectations and wage adjustments drive the economy towards the long-run Phillips Curve by influencing worker bargaining power and the level of output. As workers anticipate higher inflation, they demand higher wages, causing firms to increase prices leading to a higher price level. As a result, there is an upward shift in the short-run Phillips Curve. However, over time, workers and firms adjust their inflation expectations, and wages adjust accordingly leading to a downward shift of the short-run Phillips Curve. Ultimately, the economy settles at the natural rate of unemployment at which the short-run Phillips Curve intersects the long-run Phillips Curve.

The Automatic Adjustment Mechanism That Makes the Economy Move Toward