Expectations-Driven Inflation and the Shifting Phillips Curve

Dynamic Response to a Demand Shock

An economy begins in a stable state with output at its potential level and a constant rate of inflation. The government then enacts a large and persistent increase in its spending. Place the following economic adjustments into the correct chronological sequence to show how the economy responds over time.

An economy is in a stable equilibrium with output at its potential level and a constant rate of inflation. A sudden, permanent, and positive technology shock occurs, significantly increasing the economy's productive capacity. Assuming no immediate policy intervention, which statement best analyzes the dynamic adjustment path of the economy?

In an economy experiencing a prolonged period where output is consistently above its potential level, the initial inverse relationship between the unemployment rate and the inflation rate will remain stable over time, provided no new external shocks occur.