Ultimately, what causes the short-run reduction in unemployment associated with an increase in inflation?
A) the shape of the long-run aggregate-supply curve
B) unanticipated inflation, not inflation per se
C) rational expectations
D) anticipated changes in the price level

Question

Quizplus · Accepted Answer

According to the Phillips curve, there is an inverse relationship between unemployment and inflation in the short run. This relationship is based on the assumption that changes in the price level are not fully anticipated by workers and firms. However, in the long run, the curve becomes vertical as expectations adjust, and the unemployment rate returns to its natural rate. Therefore, an increase in inflation may reduce unemployment in the short run, but only if it is unanticipated. If workers and firms expect inflation, they will adjust their behavior accordingly, and the short-run tradeoff between unemployment and inflation will disappear.

Ultimately, What Causes the Short-Run Reduction in Unemployment Associated with an Increase