If unemployment is below its natural rate,what happens to move the economy to long-run equilibrium?
A)Inflation expectations rise which shifts the short-run Phillips curve to the right.
B)Inflation expectations rise which shifts the short-run Phillips curve to the left.
C)Inflation expectations fall which shifts the short-run Phillips curve to the right.
D)Inflation expectations fall which shifts the short-run Phillips curve to the left.

Question

Quizplus · Accepted Answer

If unemployment is below its natural rate, it means that there is excess demand in the economy, which puts upward pressure on prices. As a result, inflation expectations rise. This, in turn, causes the short-run Phillips curve to shift to the right, as firms start to anticipate higher inflation and raise prices even more. Eventually, this leads to a higher actual inflation rate and a higher natural rate of unemployment, bringing the economy back to its long-run equilibrium.

If Unemployment Is Below Its Natural Rate,what Happens to Move