An increase in expected inflation will shift
A) both the short-run and the long-run Phillips curves to the right.
B) only the short-run Phillips curve to the right.
C) only the long-run Phillips curve to the right.
D) the short-run Phillips curve to the right and increase the slope of the long-run Phillips curve.

Question

Quizplus · Accepted Answer

An increase in expected inflation will shift only the short-run Phillips curve to the right. This is because in the short-run, there is a trade-off between inflation and unemployment. When expected inflation increases, workers will demand higher wages to keep up with the expected increase in prices. This, in turn, increases the cost of production for firms, leading to an increase in prices and, therefore, inflation. As a result, the short-run Phillips curve shifts to the right, showing a higher inflation rate at any given level of unemployment. However, in the long-run, the Phillips curve becomes vertical, indicating that there is no trade-off between inflation and unemployment. In the long-run, the economy returns to its natural rate of unemployment, and any increase in expected inflation only leads to a higher actual inflation rate, without affecting the level of unemployment. Therefore, the long-run Phillips curve remains the same.

An Increase in Expected Inflation Will Shift