Suppose the expected inflation rate is 12 percent and the unemployment rate is 5 percent. If the expected inflation rate increases to 13 percent,
A) there will be a movement along the short-run Phillips curve.
B) the short-run Phillips curve will shift downward.
C) the natural unemployment rate will rise.
D) the short-run Phillips curve will shift upward.

Question

Quizplus · Accepted Answer

An increase in the expected inflation rate would shift the short-run Phillips curve upward, indicating that at any given unemployment rate, the expected rate of inflation is higher. This is because workers will demand higher wages to compensate for the higher expected inflation, leading firms to raise prices to cover the increased labor costs. Therefore, the trade-off between inflation and unemployment would deteriorate, and higher inflation would be associated with higher unemployment.

Suppose the Expected Inflation Rate Is 12 Percent and the Unemployment