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      Question

      In the context of the New Keynesian Phillips Curve,

      inflation depends on which of the following factors?
      A Only past inflation and the current output gap. Correct Answer Incorrect Answer
      B Current output gap and expected future inflation. Correct Answer Incorrect Answer
      C Only the natural rate of unemployment. Correct Answer Incorrect Answer
      D The money supply growth rate and velocity of money. Correct Answer Incorrect Answer

      Solution

      Unlike the traditional Phillips curve, the New Keynesian version is forward-looking, suggesting that firms set prices based on their expectations of future inflation and current demand pressures (the output gap).

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