What can be inferred from an increase in inflationary expectations?
A) that unemployment is above the natural rate
B) that the economy is NOT on the long-run Phillips curve
C) that the short-run Phillips curve is shifting to the left
D) that output is below potential GDP

Question

What can be inferred from an increase in inflationary expectations?  
A) that unemployment is above the natural rate 
B) that the economy is NOT on the long-run Phillips curve 
C) that the short-run Phillips curve is shifting to the left 
D) that output is below potential GDP

Quizplus · Accepted Answer

An increase in inflationary expectations indicates that people and businesses expect prices to rise which signals that the economy is shifting away from the long-run Phillips curve. The long-run Phillips curve is the relationship between unemployment and inflation when the economy is at full employment and potential GDP. In this situation, changes in inflationary expectations do not affect the unemployment rate. Therefore, Option A, C, and D are incorrect.

What Can Be Inferred from an Increase in Inflationary Expectations