Question

In the context of Expectations Augmented Phillips Curve (EAPC), which of the following statements is/are correct?

• A. An increase in the natural rate of unemployment shifts EAPC to the left.
• B. An increase in the expected inflation shifts EAPC up and to the right.
• C. If actual unemployment rate equals the natural rate of unemployment, the unanticipated inflation equals zero.
• D. As long as actual unemployment rate exceeds the natural rate of unemployment, the actual inflation rate exceeds the expected inflation.

Hint:

In the EAPC, expected inflation shifts the curve vertically, while deviations of actual unemployment from its natural rate cause temporary inflation or deflation.

Answer 1

The Correct Option is B, C

Step 1: Recall the EAPC equation.
\[ \pi = \pi^e - \alpha (u - u_n), \] where $\pi$ is actual inflation, $\pi^e$ is expected inflation, $u$ is actual unemployment, and $u_n$ is the natural rate of unemployment.
Step 2: Analyze each statement.
(A) False — An increase in $u_n$ shifts the curve to the right, not left.
(B) True — Higher expected inflation shifts the entire curve upward (for every $u$).
(C) True — When $u = u_n$, unanticipated inflation $(\pi - \pi^e)$ equals zero.
(D) False — If $u>u_n$, actual inflation is less than expected inflation.
Step 3: Conclusion.
Correct statements are (B) and (C).