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

Question

Quizplus · Accepted Answer

An upward shift of the short-run Phillips curve is expected because if firms and consumers anticipate inflation due to expansionary monetary policy, they will adjust their expectations and behavior accordingly. This adjustment can lead to higher wage demands and prices, moving the short-run Phillips curve upward as inflation expectations become incorporated into economic decisions.

If the Bank of Canada Chooses to Fight High Unemployment