Suppose an economy experiences a permanent increase in its expected inflation rate.As a result, there is
A) an upward movement along the short-run Phillips curve.
B) a downward movement along the short-run Phillips curve.
C) a downward shift of the short-run Phillips curve.
D) an upward shift of the short-run Phillips curve.
E) no change at all to the short-run Phillips curve.

Question

Quizplus · Accepted Answer

An increase in expected inflation means that workers and firms will anticipate higher inflation and adjust their behavior accordingly. As a result, there will be an increase in wages and prices in the short-run, causing a movement along the existing Phillips curve. However, over the long-run, workers and firms will come to expect the higher inflation rate, and so the Phillips curve will shift upward to reflect this new equilibrium. Therefore, the correct answer is an upward shift of the short-run Phillips curve.

Suppose an Economy Experiences a Permanent Increase in Its Expected