The short-run Phillips curve:
A) shifts upward if expected inflation increases.
B) shifts upward if expected inflation decreases.
C) shifts downward if expected inflation increases.
D) is vertical.

Question

Quizplus · Accepted Answer

According to the short-run Phillips curve, there is an inverse relationship between unemployment and inflation. If expected inflation increases, workers and firms will adjust their wage and price setting behavior accordingly, which will increase actual inflation. As a result, the short-run Phillips curve will shift upward to reflect the new relationship between unemployment and inflation.

The Short-Run Phillips Curve