Suppose the expected inflation rate is 12 percent and the unemployment rate is 5 percent.If the expected inflation rate increases to 13 percent,
A) the short-run Phillips curve will shift upward.
B) the short-run Phillips curve will shift downward.
C) there will be a movement along the short-run Phillips curve.
D) the natural unemployment rate will rise.

Question

Quizplus · Accepted Answer

An increase in the expected inflation rate will cause the short-run Phillips curve to shift upward. This is because a higher expected inflation rate means that workers and firms will adjust their behavior to accommodate higher inflation, causing wages and prices to rise at a faster rate. As a result, the unemployment rate will need to be higher to keep inflation stable.

Suppose the Expected Inflation Rate Is 12 Percent and the Unemployment