Discussion
The short-run Phillips curve in case of an increase in inflationary expectations would result in :
Answer: B
The short-run Phillips curve would shift to right.
In the expectations-augmented Phillips curve of Friedman and Phelps, each short-run curve is drawn for a given expected rate of inflation: \(\pi = \pi^{e} - \beta(u - u_{n})\). If expected inflation rises, every rate of unemployment is now associated with higher inflation, so the curve shifts up and to the right.
A leftward shift would follow a fall in expected inflation. The vertical line is the long-run Phillips curve at the natural rate of unemployment, and the curve cannot stay unchanged when one of its shift factors changes.
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