What impact does expansionary monetary policy have on the short-run Phillips curve if consumers and firms expect the expansionary monetary policy to increase inflation?

Question

Quizplus · Accepted Answer

If consumers and firms expect the expansionary monetary policy to increase inflation, then they will anticipate higher prices and factor that into their decisions. This means that any increase in aggregate demand from the expansionary monetary policy will lead to a greater increase in prices than it would have otherwise, moving the economy up along the short-run Phillips curve. This results in a higher trade-off between inflation and unemployment, shifting the Phillips curve up.

What Impact Does Expansionary Monetary Policy Have on the Short-Run