Figure: Expected Inflation and the Short-Run Phillips Curve SRPC 0 is the Philli

Question

Figure: Expected Inflation and the Short-Run Phillips Curve
SRPC0 is the Phillips curve with an expected inflation rate of zero; SRPC2 is the Phillips curve with an expected inflation rate of 2%.

Reference: Ref 16-6

(Figure: Expected Inflation and the Short-Run Phillips Curve) Look at the figure Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an unemployment rate of 6%, inflation of 2%, and an expectation of 2% future inflation. If the central bank decreases the money supply such that aggregate demand shifts to the left and unemployment rises to 8%, then inflation will:

fall to zero.

rise to 4%.

not change.

rise to 2%.

Figure: Expected Inflation and the Short-Run Phillips Curve
SRPC0 is the Phillips curve with an expected inflation rate of zero; SRPC2 is the Phillips curve with an expected inflation rate of 2%.

Reference: Ref 16-6

(Figure: Expected Inflation and the Short-Run Phillips Curve) Look at the figure Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an unemployment rate of 6%, inflation of 2%, and an expectation of 2% future inflation. If the central bank decreases the money supply such that aggregate demand shifts to the left and unemployment rises to 8%, then inflation will:

fall to zero.

rise to 4%.

not change.

rise to 2%.

Explanation / Answer

Phillips curve shows negative relationship between inflation and unemployment.Leftward shift of AD causes decrease in ouput with given AS.It also causes deflation.With decrease in output ,firms hire less workers which is causing here rise in unemployment.

So we expect that ,if unemployment rises by 2%,that is from 6 to 8%,then infaltion will fall by 2% ,that is from 2 to 0%.

So ,inflation fall to zero.

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