Suppose that workers and business firms believe that the Fed will take action to prevent demand shocks from causing a permanent change in the inflation rate.
(a) Will the short-run Phillips Curve shift when a change in the output ratio changes the inflation rate?
(b) For workers and business firms to continue to hold these expectations, explain what actions the Fed must take when there is a positive demand shock and when there is a negative demand shock.
This question was answered on: Jul 11, 2017
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