When the expected inflation rate ________, the short-run Phillips curve ________.
A) falls; shifts upward
B) rises; shifts upward
C) rises; shifts downward
D) falls; does not shift
E) rises; might shift upward or downward depending on how the long-run Phillips curve shifts

Question

Quizplus · Accepted Answer

According to the Phillips curve, there is an inverse relationship between inflation and unemployment in the short run. When the expected inflation rate increases, workers and firms adjust their expectations, leading to higher actual inflation rates. As a result, the short-run Phillips curve shifts upward, indicating that a higher inflation rate is associated with a higher level of unemployment. Conversely, if the expected inflation rate falls, the short-run Phillips curve shifts downward, meaning that a lower inflation rate results in lower unemployment.

When the Expected Inflation Rate ________, the Short-Run Phillips Curve