Output will be maintained at 1 percent above its potential for the next five years. Which of the following is a possible scenario of successive inflation rates over that period assuming no outside price shocks and an expectations- augmented Phillips curve?
A) 1 percent, 2 percent, 3 percent, 5 percent, and 8 percent
B) 10 percent, 11 percent, 13 percent, 12 percent, and 10 percent
C) 15 percent for each of the next five years
D) 8 percent, 7 percent, 5 percent, 3 percent, and 2 percent
E) 9 percent, 7 percent, 4 percent, 10 percent, and 15 percent

Question

Quizplus · Accepted Answer

If output is maintained above its potential, inflation will likely increase each year due to the expectations-augmented Phillips curve, which suggests that inflation expectations adjust upwards when output exceeds potential.

Output Will Be Maintained at 1 Percent Above Its Potential