The key to understanding the short-run trade-off behind the Phillips curve is that an increase in inflation will decrease unemployment if the inflation is ________ by both workers and firms.

Question

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The short-run Phillips curve shows a trade-off between inflation and unemployment only if workers and firms are caught off guard by unexpected changes in inflation. If both parties anticipate inflation, they will adjust their behavior accordingly, and the trade-off disappears. A gradual increase in expected inflation will lead to a movement along the Phillips curve but not a shift of the curve.

The Key to Understanding the Short-Run Trade-Off Behind the Phillips