Consider an economy that is operating at the intersection of the short-run and long run Phillips curves. The level of unemployment is 2.5 per cent while the level of inﬂation is 4 per cent. At this point, if speculation about oil price hikes increase inﬂationary expectations in this economy, which of the following must happen?
A) The level of unemployment will be higher than 2.5 per cent at the new equilibrium.
B) The short-run Phillips curve will move up and the new level of inﬂation will be higher than 4
C) The economy will move up along the short-run Phillips curve, increasing the level of inﬂation above 4 per cent.
D) The short-run Phillips curve will move down from its original position.

Question

Quizplus · Accepted Answer

When inflationary expectations increase, the short-run Phillips curve shifts upward, leading to a higher level of inflation at the new equilibrium.

Consider an Economy That Is Operating at the Intersection of the Short-Run