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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%, inflation of 2%, and an expectation of 2% 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:

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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%, inflation of 2%, and an expectation of 2% 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

When the central bank increases the money supply, aggregate demand increases, leading to lower unemployment and higher inflation. With unemployment falling to 4%, inflation will rise above the expected 2%, likely to 4% due to the short-run trade-off depicted by the Phillips Curve.

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