Under conditions of rational expectations of inflation,
A) the Phillips curve will eventually shift to the right if the economy is expending and inflation is increasing.
B) the Phillips curve will shift to the left if the economy is expanding and inflation is increasing.
C) the Phillips curve will remain in place and unemployment will decrease if the economy is expanding
And inflation is increasing.
D) the Phillips curve will shift as rapidly as, or faster than, changes in economic policy that affect the level of aggregate demand.

Question

Quizplus · Accepted Answer

Under conditions of rational expectations, individuals anticipate changes in economic policy that affect aggregate demand and adjust their expectations of inflation accordingly. This means the Phillips curve, which illustrates the trade-off between inflation and unemployment, can shift as rapidly as or faster than changes in economic policy, as people adjust their behavior based on their expectations of future inflation.

Under Conditions of Rational Expectations of Inflation