If expectations about inflation are formed as per the rational expectations hypothesis, then the short-run Phillips curve will be
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- negatively sloped
- parallel to the vertical axis
- parallel to the horizontal axis
- coinciding with the NAIRU
The Correct Option is B
Solution and Explanation
The rational expectations hypothesis assumes that individuals form expectations based on all available information, and these expectations are correct on average. This means that individuals' expectations of future inflation will align with actual inflation.
Step 2: The Short-Run Phillips Curve under Rational Expectations.
According to the rational expectations hypothesis, the short-run Phillips curve becomes vertical because individuals adjust their expectations of inflation. As a result, there is no trade-off between inflation and unemployment in the long run, and the short-run Phillips curve becomes vertical, coinciding with the NAIRU (Non-Accelerating Inflation Rate of Unemployment).
Step 3: Conclusion.
The short-run Phillips curve under the rational expectations hypothesis is vertical, meaning it is parallel to the vertical axis. Therefore, the correct answer is (B).
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