Figure 8-1
-Everywhere to the left of the long-run Phillips Curve as in the figure above
A) actual inflation is less than expected inflation and the expected inflation rate will be reduced.
B) actual inflation is less than expected inflation and the expected inflation rate will be raised.
C) actual inflation is greater than expected inflation and the expected inflation rate will be raised.
D) actual inflation is greater than expected inflation and the expected inflation rate will be reduced.

Question

Figure 8-1 
-Everywhere to the left of the long-run Phillips Curve as in the figure above
A) actual inflation is less than expected inflation and the expected inflation rate will be reduced. 
B) actual inflation is less than expected inflation and the expected inflation rate will be raised. 
C) actual inflation is greater than expected inflation and the expected inflation rate will be raised. 
D) actual inflation is greater than expected inflation and the expected inflation rate will be reduced.

Quizplus · Accepted Answer

Everywhere to the left of the long-run Phillips Curve represents a situation of lower actual inflation than expected inflation. This implies that firms and workers have overestimated the level of aggregate demand in the economy, leading to a situation of surplus production capacity and downward pressure on prices. In response to this, the expected inflation rate will be reduced as firms and workers adjust their behavior to the new information about the state of the economy.

Figure 8-1 -Everywhere to the Left of the Long-Run Phillips Curve as Phillips