Which factor shifts the short-run Phillips curve to a higher inflation position?

• A. Decrease in expected inflation
• B. Surprise decrease in money supply
• C. Increase in expected inflation
• D. Decrease in unemployment independent of inflation

Answer: (C)

The key idea is that expectations about inflation can move the entire short-run Phillips curve. When people expect higher inflation, wages and prices tend to rise more, because workers and firms incorporate that expected rise into wage bargains and pricing decisions. As a result, for any given unemployment rate, the actual inflation rate ends up higher. This is why higher expected inflation shifts the short-run Phillips curve to a position with higher inflation at each unemployment level.

If expected inflation falls, the curve shifts downward. A surprise decrease in money supply affects demand and moves the economy along the curve to higher unemployment and lower inflation rather than shifting the curve itself. A decrease in unemployment independent of inflation doesn’t reflect the typical shift mechanism captured by the Phillips framework.