If firms and workers have rational expectations,including knowledge of the policy being used by the Federal Reserve,the short-run Phillips curve will be

Question

Quizplus · Accepted Answer

If firms and workers have rational expectations, they will anticipate the effects of the monetary policy implemented by the Federal Reserve. As a result, they will adjust their behavior accordingly, and the short-run Phillips curve will become vertical. In other words, any attempt by the Fed to reduce unemployment below its natural rate through expansionary monetary policy will only cause inflation. This is consistent with the idea of the natural rate of unemployment, which denotes the level of unemployment that corresponds to a non-accelerating inflation rate of unemployment (NAIRU) or the long-run Phillips curve.

If Firms and Workers Have Rational Expectations,including Knowledge of the Policy