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Question
Microeconomics
Posted 6 months ago

What happens in the long run as people begin to expect a permanantly higher rate of inflation?

Choose 1 answer:
(A) The short-run Phillips curve (SRPC) shifts to the right
(B) The long-run Phillips curve (LRPC) shifts to the left
(C) The long-run Phillips curve (LRPC) shifts to the right
(D) The short-run Phillips curve (SPRC) shifts to the left.
(E) A movement to the right along the short-run Phillips curve (SRPC)
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Answer from Sia
Posted 6 months ago
Solution
a
Expectation of Inflation: When people begin to expect a permanently higher rate of inflation, their behavior changes accordingly
b
Short-Run Phillips Curve (SRPC): The SRPC represents the trade-off between inflation and unemployment in the short run
c
Shift in SRPC: As expectations of higher inflation become embedded, the SRPC shifts to the right. This shift occurs because workers and firms adjust their expectations, leading to higher wage demands and price settings
Answer
(A) The short-run Phillips curve (SRPC) shifts to the right
Key Concept
Inflation Expectations and SRPC
Explanation
When people expect higher inflation in the long run, the short-run Phillips curve shifts to the right because workers and firms adjust their behavior to anticipate higher prices, leading to higher wage demands and price settings.

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