If inflationary expectations increase, the Phillips curve will

• A. Become vertical
• B. Shift to the right
• C. Become upward sloping
• D. Shift to the left

Answer: (B)

Inflation expectations influence the short-run trade-off between unemployment and inflation. When people expect higher inflation, wage bargains and price setting incorporate that expectation, so actual inflation is higher at every unemployment rate. Graphically, the short-run Phillips curve shifts to the right, meaning more inflation for any given level of unemployment. The basic downward slope can stay the same, but the curve sits higher. It doesn’t become vertical (that’s a long-run property where unemployment is the natural rate) and it doesn’t shift left (that would imply lower inflation at every unemployment rate).