Consider an Economy with an Expectations-Augmented Phillips Curve and Expectations

question 66

Multiple Choice

Consider an economy with an expectations-augmented Phillips curve and expectations always set equal to last year's inflation rate. Let the rate of unemployment fall 1 point below the natural rate in 1993 before returning to the natural rate for the rest of the decade. If the coefficient linking the percentage GDP gap and inflation were 0.5, then you would predict

• A) a one-shot increase in inflation for 1993 of 1.5 percent.
• B) a perpetual increase in inflation for 1993 and beyond of 0.5 percent.
• C) a one-shot increase in inflation for 1993 of 0.5 percent.
• D) a perpetual increase in inflation for 1993 and beyond of 1.5 percent.
• E) none of the above.

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