If the Fed makes a credible announcement that it will now increase the growth of aggregate demand with faster money growth, there will be
A) an upward shift of the short-run Phillips curve so that there is higher inflation without a decrease in unemployment.
B) a movement upward along an unchanging short-run Phillips curve so that inflation rises and unemployment decreases.
C) a rightward shift of the long-run Phillips curve.
D) no change in inflation or unemployment because the policy is credible and now anticipated.
E) a leftward shift of the long-run Phillips curve.

Question

Quizplus · Accepted Answer

If the Fed makes a credible announcement to increase aggregate demand with faster money growth, this will lead to an anticipated increase in inflation. This, in turn, causes workers and firms to revise their inflation expectations, leading to an upward shift of the short-run Phillips curve. As a result, there will be higher inflation without a decrease in unemployment.

If the Fed Makes a Credible Announcement That It Will