Time inconsistency will cause the
A)short-run Phillips curve to be higher than otherwise.
B)short-run Phillips curve to be lower the otherwise.
C)long-run Phillips curve to be farther to the right than otherwise.
D)long-run Phillips curve to be farther left than otherwise.

Question

Quizplus · Accepted Answer

Time inconsistency in economic policy, particularly in monetary policy, can lead to higher inflation expectations among the public. This, in turn, shifts the short-run Phillips curve upwards as workers demand higher wages to compensate for expected inflation, and firms raise prices in anticipation of higher costs, all else being equal. This does not directly affect the position of the long-run Phillips curve, which is vertical at the natural rate of unemployment, indicating that in the long run, there is no trade-off between inflation and unemployment.

Time Inconsistency Will Cause the