Consider an expectations-augmented Phillips curve with the expected rate of inflation set equal to last year's rate. One way for inflation to come in below expectations for the current year is for
A) the economy to run above potential, so that greater supply can lower prices.
B) the economy to run at potential, so that planned investment can cause the economy to grow out of the inflation.
C) the economy to run a recession, so that unemployment and output can fall short of potential and put downward pressure on prices.
D) the government to impose strict wage and price controls limiting inflation to 50 percent of last year's rate.
E) c but only if accompanied by d.

Question

Quizplus · Accepted Answer

The expectations-augmented Phillips curve suggests that inflation can come in below expectations if the economy is underperforming, leading to higher unemployment and lower output than potential, which puts downward pressure on prices.

Consider an Expectations-Augmented Phillips Curve with the Expected Rate of Inflation