If expectations are adaptive, how will the economy adjust to a new long-run equilibrium in response to expansionary monetary policy? Support your answer with a graph of the Phillips curve

What will be an ideal response?

Expansionary monetary policy increases the inflation rate. With adaptive expectations, workers and firms will underestimate inflation, resulting in a decrease in the real wage and a decrease in the unemployment rate (move from A to B on the short-run Phillips curve below). Eventually, workers and firms will adjust to the fact that inflation is higher, shifting the short-run Phillips curve up and increasing the unemployment rate to its natural rate (move from B to C in the graph below).