Consider an Economy That Is Operating at the Intersection of the Short-Run

Multiple Choice

Consider an economy that is operating at the intersection of the short-run and long run Phillips curves. The level of unemployment is 2.5 per cent while the level of inflation is 4 per cent. At this point, if speculation about oil price hikes increase inflationary expectations in this economy, which of the following must happen?

A) The level of unemployment will be higher than 2.5 per cent at the new equilibrium.
B) The short-run Phillips curve will move up and the new level of inflation will be higher than 4
C) The economy will move up along the short-run Phillips curve, increasing the level of inflation above 4 per cent.
D) The short-run Phillips curve will move down from its original position.