Answer to Question #246436 in Macroeconomics for Prisca Mahlalela

Question

The long run Phillips curve shifts to the left when:

A. the aggregate demand curve shifts to the right.

B. there is a fall in inflation expectations.

C. there is a rise in inflation expectations.

D. technology and human capital increases.

Answer 1

Answer: B. there is a fall in inflation expectations.

If people believe that the government really will honor its promise to reduce inflation, than inflation expectations fall. This change in expectations shifts the short-run Phillips curve left so that at any actual inflation rate the unemployment rate will be lower.