An increase in price expectations shifts the Phillips curve upward and makes the inflation unemployment trade-off...

An increase in price expectations shifts the Phillips curve upward and
makes the inflation unemployment trade-off less favourable.True or false?(+explanation)

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Expert Solution

The Phillips curve establishes a tradeoff between inflation and unemployment in shortrun. An increase in inflation leads to higher output and lower unemployment and a lower inflation leads to lower output and higher unemployment. But the trade of between inflation and unemployment is not favourable when there is an inflation expectation. An increase in aggregate demand raises the price level and reduces the unemployment. But when the people start to expect higher inflation the wage rate and resource price increase which will reduce the aggregate supply, the Phillips curve shift upward and the economy will suffer from inflation and higher unemployment. Thus the economy benefit from higher inflation only in shortrun. When the people raise their expectation about inflation, the inflation unemployment tradeoff is less favourable.

Answer: True.

Rahul Sunny answered 1 year ago

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