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Figure: Expected Inflation and the Short-Run Phillips Curve
SRPC 0 is the Phillips curve with an expected inflation rate of zero; SRPC 2 is the Phillips curve with an expected inflation rate of 2%.
-(Figure: Expected Inflation and the Short-Run Phillips Curve) Look at the figure Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an unemployment rate of 6%, no inflation, and no expectation of inflation. If the central bank increases the money supply such that aggregate demand shifts to the right and unemployment falls to 4%, then inflation will:

Question

Use the following to answer questions :
Figure: Expected Inflation and the Short-Run Phillips Curve
SRPC 0 is the Phillips curve with an expected inflation rate of zero; SRPC 2 is the Phillips curve with an expected inflation rate of 2%. 
-(Figure: Expected Inflation and the Short-Run Phillips Curve) Look at the figure Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an unemployment rate of 6%, no inflation, and no expectation of inflation. If the central bank increases the money supply such that aggregate demand shifts to the right and unemployment falls to 4%, then inflation will:

Quizplus · Accepted Answer

According to the Phillips curve with an expected inflation rate of zero (SRPC₀), a decrease in unemployment from 6% to 4% will increase the expected inflation rate from zero to 2%. However, if the actual inflation rate is equal to the expected inflation rate, then the inflation rate will rise to 2%. Therefore, inflation will rise to 2% (Choice C).

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