Multiple Choice
Suppose that an economy has been experiencing actual inflation that is equal to expected inflation. This economy would most likely be operating at point:
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20. Tradeoffs Between Inflation and Unemployment
Phillips Curve and Expected Inflation
Multiple Choice
Suppose that an economy suddenly experiences actual inflation that is below the expected level of inflation. This will likely cause short-run movement:
A
From Point C to Point A
B
From Point A to Point C
C
From Point E to Point C
D
From Point C to Point E
E
From Point C to Point D
Verified step by step guidance1
Step 1: Understand the graph components. The graph shows the Short-Run Phillips Curve (SRPC) as a downward-sloping line and the Long-Run Phillips Curve (LRPC) as a vertical line. Points A, B, C, D, and E represent different combinations of inflation and unemployment rates.
Step 2: Identify the initial position. Point C lies on the LRPC and SRPC, indicating the economy is at the natural rate of unemployment with expected inflation matching actual inflation.
Step 3: Analyze the effect of actual inflation being below expected inflation. When actual inflation is lower than expected, the short-run trade-off shifts, causing movement along the SRPC to a point with lower inflation and higher unemployment.
Step 4: Locate the new short-run equilibrium. Since actual inflation is below expected inflation, the economy moves down along the SRPC from Point C to a point with lower inflation and higher unemployment, which corresponds to Point E on the graph.
Step 5: Conclude the short-run movement. The economy moves from Point C to Point E, reflecting the adjustment to lower actual inflation relative to expected inflation, with increased unemployment in the short run.
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