Question

How might low inflation expectations on the part of the public help to hold down actual inflation? Explain.

Short answer

As a result, the long-run Phillips curve was shifted to the right by $6.5\%$. This is in response to the belief that lowering inflation below its natural level will raise inflation.

Step-by-step solution

Step: 1 Introduction:

A reduction (back to the left shifting) of the aggregate curve is caused by a drop in inflationary expectations. Interest rates, the federal debt, and the money creation are all important aggregate demand factors. Consumers' inflationary expectations are their expectations for future inflation.

Step: 2 Unemployment rate:

According to research, the Federal should allow inflation to grow from its present goal level of $2\%$ in order to lower the unemployment rate. The present unemployment rate criterion of $6.5\%$ was too high, and with the promise of low borrowing rates, a more reasonable level will be $5.5\%$.

Step: 3 Actual inflation:

Also with level of unemployment rising, the long-run Phillips curve was shifted to the right by$6.5\%$. This is in response to the belief that lowering inflation below its natural level will raise inflation.