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Fed Officials Worried About Inflation Becoming ‘Entrenched’

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Many Fed officials are raising concerns that longer-run inflation expectations could be beginning to drift up to levels inconsistent with the Fed’s goals. The officials stressed that clear and effective communications, along with higher rates are essential in restoring price stability.—axios.com

Answer the following questions to check your understanding of the story.

What happens to the short-run Phillips curve when inflation expectations drift upward?

When inflation expectations drift upward, ______________.

Wrong! - The short-run Phillips curve intersects the long-run Phillips curve at the expected inflation rate and the natural unemployment rate. Is there a shift of the short-run Phillips curve or a movement along the short-run Phillips curve when the expected inflation rate changes?

Correct! - The short-run Phillips curve intersects the long-run Phillips curve at the expected inflation rate and the natural unemployment rate. When the expected inflation rate rises, the short-run Phillips curve shifts upward.

Why does the Fed engage in “clear and effective communications, along with higher rates” to restore price stability?

The Fed wants ______________.

Wrong! - When the expected inflation rate falls, what happens to the short-run Phillips curve? When the inflation rate falls, what happens to the unemployment rate as a movement occurs along the short-run Phillips curve?

Good Job! - The Fed wants the expected inflation rate to fall, which will shift the short-run Phillips curve downward and lower the inflation rate without increasing the unemployment rate.

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