Suppose that the expected inflation rate decreases from 5 pe

Suppose that the expected inflation rate decreases from 5 percent to 3 percent. What will happen to the short-run Phillips curve?

Solution

when there is a decrease in the expected inflation rate from 5% to 3%, it will cause a movement along the short run Philip curve and the unemployment rate in the economy will increase.

This will not cause any shift in the Philip curve but only along the Philip curve.