Figure 22-8. 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 22-8. 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

Quizplus · Accepted Answer

If people perceive the increase in the inflation rate as a temporary aberration, they will not expect it to persist and will not adjust their behavior accordingly. This means that wage and price adjustments will not occur to the same extent as if they believed the increase in inflation to be permanent. As a result, the SRAS curve will shift back to its original position, represented by PC₁.