Question

During 2017, some Fed officials discussed the possibility of increasing interest rates as a way of fighting potential increases in expected inflation. If the public came to expect higher inflation rates in the future, what would be the effect on the short-run aggregate supply curve? Use an aggregate demand and supply graph to illustrate your answer.

Short answer

The diagram showing effect of expectation of high inflation in future on short run aggregate supply curve is as follows:

Step-by-step solution

Concept Introduction  

The speed at which general price index of products and services rise which ends up within the decrease within the purchasing power of the economy is understood as inflation.

Explanation of Solution  

If the general public expect higher inflation in near future, then this expectation will shift short-run aggregate demand curve leftwards from AS to $A{S}_1$. Because high inflation will lead to increased index number, therefore producers reduce the mixture supply within the economy in current time to provide the products and services at higher price levels. During 2017, Federal officials were at the chance of accelerating rate of interest to regulate the inflation. Increase in rate of interest is extremely late, it'll further increase the expectation of inflation whereas increasing interest rates way too early will affect the recovery. this may cut down recover may take the economy towards the recession.