Monetary policy can

Question

Monetary policy can

Quizplus · Accepted Answer

Monetary policy can shift the short-run Phillips curve trade-off between inflation and unemployment if it affects expected inflation. This happens because changes in monetary policy affect aggregate demand and consequently prices and output levels in the short run, leading to inflation or deflation. If the central bank follows a credible monetary policy, it can affect the public's expectations of future inflation, leading to changes in current demand and prices. This, in turn, can shift the short-run Phillips curve trade-off between inflation and unemployment, allowing policymakers to achieve lower inflation without much of an increase in unemployment or vice versa. However, monetary policy has little effect on the long-run Phillips curve trade-off since that depends primarily on structural factors such as the natural rate of unemployment and the pace of technological change.

Monetary Policy Can