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Consider the following statements a. A fall in expected inflation will shift the long-run Phillips curves...

Consider the following statements

a. A fall in expected inflation will shift the long-run Phillips curves to the left.

b. A fall in expected inflation will shift the short-run Phillips curve to the left.

c. An increase in expected inflation will leave the long-run Phillips curve unaffected.

d. An increase in unanticipated inflation will change the distribution of income in the economy

1 Only (a) is correct

2 Both (c) and (d) are correct

3 (b) (c) and (d) are correct

4 Only (d) is correct

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Answer #1

Option 3.

  • The statements b, c and d are correct.
  • In the short run, the Phillips curve illustrates the trade off between inflation and unemployment. Along the short run Phillips curve, when the inflation rate is high the unemployment rate is lower and a rise in expected Inflation moves the curve upwards towards the left.
  • In long run, there is no trade off between inflation and unemployment and they are unrelated in long run. Hence an increase in expected inflation will leave Long run Phillips curve unaffected.
  • An increase in unanticipated inflation will change the distribution of income in the economy because, the asset prices of some assets increase more rapidly than the price level while the prices of some other assets increase slowly than the price level.
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