How does a decrease in the expected rate of inflation shift the Phillips curves?
A) It shifts both the short-run and long-run Phillips curves to the right.
B) It shifts the long-run Phillips curve left and the short-run Phillips curve right.
C) It shifts only the short-run Phillips curve to the right.
D) It shifts only the short-run Phillips curve to the left.

Question

Quizplus · Accepted Answer

A decrease in the expected rate of inflation shifts only the short-run Phillips curve to the left, as it reflects lower inflation expectations among workers and firms, leading to lower wage and price setting for a given level of unemployment. The long-run Phillips curve remains vertical at the natural rate of unemployment and is unaffected by changes in inflation expectations.

How Does a Decrease in the Expected Rate of Inflation