Suppose an economy experiences a permanent increase in its natural unemployment rate.This change leads to
A) an upward movement along the short-run Phillips curve.
B) a downward movement along the short-run Phillips curve.
C) a rightward shift of the short-run Phillips curve.
D) a leftward shift of the short-run Phillips curve.
E) no change in the short-run Phillips curve.

Question

Quizplus · Accepted Answer

A permanent increase in the natural unemployment rate indicates that there are now more unemployed workers in the economy for any given level of inflation. This means that the short-run Phillips curve shifts to the right as there is now a higher level of unemployment for any given level of inflation. Alternatively, we can say that the Phillips curve has become less responsive to changes in inflation (i.e. flatter) as a result of the increase in the natural rate of unemployment. Therefore, the correct answer is C.

Suppose an Economy Experiences a Permanent Increase in Its Natural