Chapter 22 - The Short-Run Trade-Off Between Inflation and Unemployment

Rational expectations

________- the theory that people optimally use all the information they have, including information about government policies, when forecasting the future.

Lower unemployment

________ means more workers are producing goods and services, the quantity of goods and services supplied would be larger at any given price level, and the long- run aggregate supply curve would shift to the right.

Supply shock

________- an event that directly alters firms costs and prices, shifting the economys aggregate supply curve and thus the Phillips curve.

Phillips curve

a curve that shows the short- run trade- off between inflation and unemployment.