If the Bank of Canada chooses to fight high inflation with contractionary monetary policy and firms and consumers expect this policy to reduce inflation, which of the following would you expect to see?

Question

Quizplus · Accepted Answer

If firms and consumers expect contractionary monetary policy to reduce inflation, they will adjust their expectations and behavior accordingly. As a result, the short-run Phillips curve will shift downward, indicating that lower inflation can be achieved with a lower rate of unemployment. This is because the expectation of lower inflation will reduce demand for goods and services, leading to lower prices and a decrease in inflationary pressures in the economy.

If the Bank of Canada Chooses to Fight High Inflation