Figure 35-9. The left-hand graph shows a short-run aggregate-supply SRAS) curve and two aggregate-demand AD) curves. On the right-hand diagram, "Inf Rate" means "Inflation Rate."
-Refer to Figure 35-9. Subsequent to the shift of the Phillips curve from PC1 to PC2, the curve will soon shift back to PC1 if people perceive the
A) increase in the inflation rate as a temporary aberration.
B) economic boom as a temporary aberration.
C) increase in the inflation rate as a sign of a new era of higher inflation.
D) economic boom as a sign of a new era of higher economic growth.

Question

Figure 35-9. The left-hand graph shows a short-run aggregate-supply SRAS) curve and two aggregate-demand AD) curves. On the right-hand diagram, "Inf Rate" means "Inflation Rate."  
-Refer to Figure 35-9. Subsequent to the shift of the Phillips curve from PC1 to PC2, the curve will soon shift back to PC1 if people perceive the
A) increase in the inflation rate as a temporary aberration. 
B) economic boom as a temporary aberration. 
C) increase in the inflation rate as a sign of a new era of higher inflation. 
D) economic boom as a sign of a new era of higher economic growth.

Quizplus · Accepted Answer

If people perceive the increase in inflation rate as a temporary aberration, they will not adjust their expectations for inflation in the long run. As a result, the short-run Phillips curve will shift back to PC1, as the economy returns to its original equilibrium. Option B is incorrect since an economic boom is not related to the Phillips curve shift, and option C is incorrect because it suggests a long-term shift in the Phillips curve, which is unlikely to happen due to the adaptive expectations assumption. Similarly, option D is incorrect since the economic growth rate is not related to the Phillips curve.