Question

If the expected rate of inflation rose at the same time as the natural rate of unemployment rose, the Phillips curve:

A.) would shift down.
B.) might shift up or down or not move.
C.) would not move.
D.) would shift up.

Answer 1

The Phillips curve would shift up if both the expected rate of inflation and the natural rate of unemployment rose because this indicates higher inflation for every level of unemployment.

Step-by-step explanation:

If the expected rate of inflation and the natural rate of unemployment both rose, the Phillips curve would shift up. The reason for this shift is that with a higher natural rate of unemployment, the relationship between unemployment and inflation changes. According to economist Milton Friedman, while there might be a temporary trade-off between inflation and unemployment, notably in the short-run Phillips curve which slopes downwards, there is no permanent trade-off. In the long run, the Phillips curve is vertical, indicating that the natural rate of unemployment is consistent with any level of inflation. Therefore, a rise in expected inflation and the natural unemployment rate would indicate higher rates of inflation at every level of unemployment, leading to an upward shift in the Phillips curve.