An increase in inflation expectations shifts the short-run Phillips curve right and has no effect on the long-run Phillips curve.

Question

Quizplus · Accepted Answer

In the short run, an increase in inflation expectations shifts the short-run Phillips curve to the right because workers and firms adjust their expectations and demand higher wages and prices. However, in the long run, the Phillips curve is vertical at the natural rate of unemployment, indicating that inflation expectations do not affect the long-run unemployment rate, thus having no effect on the position of the long-run Phillips curve.

An Increase in Inflation Expectations Shifts the Short-Run Phillips Curve