If workers and firms raise their inflation expectations

Question

Quizplus · Accepted Answer

If workers and firms raise their inflation expectations, they will demand higher wages and prices to compensate for the expected inflation. This will shift the short-run Phillips curve upward, indicating that for any level of unemployment, the expected inflation rate will be higher. As a result, actual inflation may rise or remain elevated as firms pass on their higher costs to consumers. This is because the short-run Phillips curve represents the inverse relationship between unemployment and inflation in the short run, and a shift in inflation expectations changes the level of inflation associated with any given rate of unemployment.

If Workers and Firms Raise Their Inflation Expectations