Question

On most points along a short run phillips curve, expectations of inflation are generally:_______

a. greater than actual inflation because people tend to overreact to inflationary predictions.
b. lower than actual inflation because of the money illusion.
c. not equal to actual inflation.
d. equal to actual inflation.

Answer 1

Answer: lower than actual inflation because of the money illusion.

Explanation:

The Phillips curve states that there is an inverse but stable relationship between inflation and unemployment. This theory posits that inflation is caused by economic growth which leads to employment opportunities for people and in turmy, reduces unemployment.

On most points along a short run phillips curve, expectations of inflation are generally lower than actual inflation because of the money illusion.