Monetary Policy in Highland
Highland has had inflation of 15% for many years. Highland establishes a new central bank, the Bank of Highland, with the hopes of reducing the inflation rate.
-Refer to Monetary Policy in Highland. The Bank of Highland publicizes that it intends to reduce the inflation rate to 5%. If Highlanders lower their inflation expectations, which curve shifts to the left?
A)both the short-run and the long-run Phillips curves
B)neither the short-run nor the long-run Phillips curves
C)only the short-run Phillips curve
D)only the long-run Phillips curve

Question

Quizplus · Accepted Answer

The short-run Phillips curve is a graphical representation of the inverse relationship between inflation and unemployment in the short run, assuming that inflation expectations are fixed. If Highlanders lower their inflation expectations due to the Bank of Highland's announcement, it will cause a shift in the short-run Phillips curve to the left, indicating that for any given level of unemployment, there will be a lower level of inflation. The long-run Phillips curve, on the other hand, represents the relationship between unemployment and inflation in the long run, assuming that inflation expectations adjust to changes in actual inflation. As such, it is not affected by changes in inflation expectations and will remain unchanged.