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Fact 12.4.1
The Reserve Bank of New Zealand signed an agreement with the New Zealand government in which the Bank agreed to main inflation inside a low target range.Failure to achieve the target would result in the governor of the Bank losing his job.
-Consider Fact 12.4.1.Choose the correct statement.
A)The short- run Phillips curve shifted downward because people believed that the Bank of New Zealand was serious about meeting the new low inflation target.
B)The short- run Phillips curve was abolished and New Zealand now has only a long- run Phillips curve.
C)Neither actual inflation nor expected inflation changed, and there was no change in the short- run Phillips curve.
D)A movement occurred down along the short- run Phillips curve because although the inflation rate fell, expectations did not change.
E)The short- run Phillips curve shifted leftward because when inflation expectations fall, the natural unemployment rate decreases.

Question

Quizplus · Accepted Answer

The short-run Phillips curve shifted downward because people believed that the Bank of New Zealand was serious about meeting the new low inflation target. This belief in the central bank's commitment would lead to adjusted expectations of inflation, which in turn affects the short-run Phillips curve by shifting it downward, not because of a change in the natural rate of unemployment but due to the lower inflation expectations.

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