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 trade-off behind the Phillips curve is based on the idea that if inflation is unexpected, it can temporarily reduce unemployment as workers may not immediately adjust their wage expectations and firms may increase their production to meet the increased demand. However, if inflation is expected, workers will demand higher wages to keep up with rising prices, and firms may not increase production as they will not be able to increase sales without increasing prices. Therefore, 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 unexpected. Choice B, expected inflation, does not result in a short-run trade-off, as workers will factor the inflation into their wage demands and firms will adjust production accordingly. Choice C, perfectly predicted inflation, is the same as expected inflation. Choice D, ignored inflation, does not make sense in the context of the Phillips curve as both workers and firms are assumed to have some level of knowledge or expectation about future inflation.

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