In justifying the construction of an expectations-augmented Phillips curve, outside price shocks must be viewed as
A) sudden wage adjustments.
B) sudden employment adjustments.
C) factors that affect inflation through channels other than market conditions or expectations.
D) sudden shortages in new entrants into the labor force required to support growth.
E) all of the above.

Question

Quizplus · Accepted Answer

The expectations-augmented Phillips curve incorporates the idea that inflation expectations can influence actual inflation, alongside the traditional Phillips curve concept that there is a trade-off between unemployment and inflation. Outside price shocks are viewed as factors that affect inflation through channels other than market conditions or expectations, such as supply shocks or changes in the prices of imports, which can alter inflation independently of the domestic economic conditions of employment and wage adjustments.

In Justifying the Construction of an Expectations-Augmented Phillips Curve, Outside