According to the Phillips Curve, Inflation Depends on Expected Inflation

question 85

Multiple Choice

According to the Phillips curve, inflation depends on expected inflation because:

• A) the real interest rate depends on the expected rate of inflation.
• B) the central bank sets its target inflation rate based on the expected rate of inflation.
• C) the natural level of output depends on the expected rate of inflation.
• D) when some firms set prices in advance, expected inflation influences future prices.

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Definitions:

Arbitrage

The practice of profiting from price differences of the same asset in different markets by simultaneously buying and selling it.

Treasury Bond

A long-term government debt security with a fixed interest rate, considered low-risk.

Expectations Theory

A theory in finance that predicts the future interest rates from the yield curve of long-term and short-term government bonds.

Term Structure

The relationship between interest rates or bond yields and different terms or maturities, often depicted in a yield curve.