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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%, inflation of 2%, and an expectation of 2% inflation. If the central bank increases the money supply such that aggregate demand shifts to the right and unemployment falls to 4%, 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%, inflation of 2%, and an expectation of 2% inflation. If the central bank increases the money supply such that aggregate demand shifts to the right and unemployment falls to 4%, then inflation will:

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When the central bank increases the money supply, aggregate demand increases, leading to lower unemployment and higher inflation. Given the initial conditions (2% inflation with expected inflation of 2%), a further decrease in unemployment due to increased aggregate demand would move along the short-run Phillips curve to a point with higher inflation than the initial 2%, hence inflation would rise, not remain the same or decrease.

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