A surprise reduction of inflation will come at the expense of
A) a higher expected inflation rate.
B) an increase in real GDP.
C) a recession.
D) a decrease in the natural unemployment rate.
E) a downward shift in the short-run Phillips curve.

Question

Quizplus · Accepted Answer

According to the Phillips curve, there is a trade-off between inflation and unemployment in the short-run. If inflation unexpectedly decreases, it would imply that unemployment is higher than what was initially predicted. This would lead to a decrease in consumer demand and business investment, and create a classic recession.

A Surprise Reduction of Inflation Will Come at the Expense