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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 long- run Phillips curve shifts leftward.
B)The long- run Phillips curve does not change because a change in the expected inflation rate does not shift the long- run Phillips curve.
C)The long- run Phillips curve shifts rightward.
D)The long- run Phillips curve was abolished and New Zealand now has only a short- run Phillips curve.
E)The slope of the long- run Phillips curve changes when the expected inflation rate falls.

Question

Quizplus · Accepted Answer

The agreement between the Reserve Bank of New Zealand and the government to maintain inflation within a low target range does not lead to a shift in the long-run Phillips curve because a change in the expected inflation rate does not affect the natural rate of unemployment or potential output in the long run. Therefore, there is no change in the trade-off between inflation and unemployment in the long run.

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