If the Bank of Canada announced a policy to reduce inflation and people found it credible, what would happen to the short-run Phillips curve and the sacrifice ratio?
A) The short-run Phillips curve would shift right, and the sacrifice ratio would fall.
B) The short-run Phillips curve would shift right, and the sacrifice ratio would rise.
C) The short-run Phillips curve would shift left, and the sacrifice ratio would fall.
D) The short-run Phillips curve would shift left, and the sacrifice ratio would rise.

Question

Quizplus · Accepted Answer

If the Bank of Canada's policy to reduce inflation is credible, people will adjust their inflation expectations downward. This leads to a leftward shift in the short-run Phillips curve, as lower inflation expectations reduce wage and price pressures. The sacrifice ratio, which measures the cost of reducing inflation in terms of lost output, would fall because the credible policy reduces the need for high unemployment to fight inflation.

If the Bank of Canada Announced a Policy to Reduce