Consider the Following Phillips Curve Diagram

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The Answer is Point B is not at long-run equilibrium because expectations of inflation are lower than actual inflation.Only points on the long-run PC are long-run equilibrium points.The key to the story of how the economy moves to a new long-run equilibrium is to recall that whenever actual and expected inflation are different the short run Phillips curve will shift.In this case (at point B on PC₀)expected inflation is 5% but actual inflation is 7%.Whenever actual inflation is greater than expected inflation the short-run PC will shift up.In this case to PC₁ (drawn for expected inflation of 7%).The economy will move from point B on PC₀ to point C on PC₁.Point C is a new long-run equilibrium point.

Point B is not at long-run equilibrium because expectations of inflation are lower than actual inflation.Only points on the long-run PC are long-run equilibrium points.The key to the story of how the economy moves to a new long-run equilibrium is to recall that whenever actual and expected inflation are different the short run Phillips curve will shift.In this case (at point B on PC<sub>0</sub>)expected inflation is 5% but actual inflation is 7%.Whenever actual inflation is greater than expected inflation the short-run PC will shift up.In this case to PC<sub>1</sub> (drawn for expected inflation of 7%).The economy will move from point B on PC<sub>0</sub> to point C on PC<sub>1</sub>.Point C is a new long-run equilibrium point.

Consider the Following Phillips Curve Diagram

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