A movement up along a short run Phillips Curve to an unemployment rate below the natural rate of unemployment will tend to shift the Phillips Curve up, once expectations adjust; a movement down along a short run Phillips Curve to an unemployment rate above the natural rate of unemployment will tend to shift the Phillips Curve down once expectations adjust.

Question

Quizplus · Accepted Answer

This statement is true as it describes the concept of the Phillips Curve, which shows the inverse relationship between unemployment and inflation in the short run. If there is a temporary decrease in unemployment below the natural rate, it will lead to higher inflation expectations and shift the Phillips Curve up. Conversely, a temporary increase in unemployment above the natural rate will lead to lower inflation expectations and shift the Phillips Curve down. This is known as the "adaptive expectations" theory of the Phillips Curve.

A Movement Up Along a Short Run Phillips Curve to an Unemployment