According to the theory of rational expectations, when it comes to expected changes in the inflation rate, the short-run Phillips curve would be:
A)vertical.
B)horizontal.
C)upward sloping.
D)downward sloping.

Question

According to the theory of rational expectations, when it comes to expected changes in the inflation rate, the short-run Phillips curve would be:
A)​vertical.
B)​horizontal.
C)​upward sloping.
D)​downward sloping.

Quizplus · Accepted Answer

According to the theory of rational expectations, individuals form their expectations of future inflation based on all available information, including past trends and government policies. If people expect a certain inflation rate based on this information, then any attempt by policymakers to increase aggregate demand and push inflation above this expected rate will be met with an equal and opposite adjustment in the expected inflation rate, leaving actual inflation unchanged. Thus, the short-run Phillips curve becomes vertical, indicating that there is no trade-off between inflation and unemployment in the short run. A policy that tries to push unemployment below its natural rate will only cause inflation to increase without any reduction in unemployment.

According to the Theory of Rational Expectations, When It Comes