The short-run effects of an increase in the expected price level include
A)a lower level of output and a lower price level.
B)a lower level of output and a higher price level.
C)a higher level of output and a lower price level.
D)a higher level of output and a higher price level.

Question

Quizplus · Accepted Answer

According to the short-run Phillips curve, there is a negative relationship between inflation and unemployment in the short run. An increase in the expected price level will lead to an increase in the actual price level, causing inflation. As a result, firms will increase their output in the short run to meet the higher demand for goods and services, leading to a lower level of unemployment. However, the increase in production costs due to higher prices for inputs will lead to a lower level of output than the economy would have produced at the original price level. Therefore, the short-run effect of an increase in the expected price level is a lower level of output and a higher price level.

The Short-Run Effects of an Increase in the Expected Price