In the early 1970s,the short-run Phillips curve shifted
A)rightward as inflation expectations rose.
B)rightward as inflation expectations fell.
C)leftward as inflation expectations rose.
D)leftward as inflation expectations fell.

Question

Quizplus · Accepted Answer

In the early 1970s, the short-run Phillips curve shifted rightward as inflation expectations rose. This was due to the increase in actual inflation rates, which led workers to demand higher wages to keep up with the rising prices. As a result, firms increased their prices to cover the higher labor costs, creating a self-reinforcing cycle of inflation and wage increases. This shift in the Phillips curve meant that policymakers could no longer use short-run trade-offs between inflation and unemployment as a tool for stabilization policy.

In the Early 1970s,the Short-Run Phillips Curve Shifted