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-(Figure: Expected Inflation and the Short-Run Phillips Curve) SRPC₀ is the Phillips curve with an expected inflation rate of zero; SRPC₂ is the Phillips curve with an expected inflation rate of 2%. Refer to Figure: Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an unemployment rate of 6%, no inflation, and no expectation of inflation. If the central bank decreases the money supply such that aggregate demand shifts to the left and unemployment rises to 8%, then inflation will:

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-(Figure: Expected Inflation and the Short-Run Phillips Curve) SRPC₀ is the Phillips curve with an expected inflation rate of zero; SRPC₂ is the Phillips curve with an expected inflation rate of 2%. Refer to Figure: Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an unemployment rate of 6%, no inflation, and no expectation of inflation. If the central bank decreases the money supply such that aggregate demand shifts to the left and unemployment rises to 8%, then inflation will:

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When the central bank decreases the money supply, aggregate demand decreases, leading to higher unemployment and lower inflation. If the economy initially has no inflation and the policy increases unemployment, it suggests a movement along the Phillips curve to a point with lower inflation, potentially negative, indicating deflation.

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