Suppose that in a given country, the line of best fit approximates the Phillips curve shown here. When the output gap is 4%:

A)there is insufficient demand.
B)inflation rises above expected inflation.
C)unexpected inflation is zero.
D)the output gap is negative.

Question

Suppose that in a given country, the line of best fit approximates the Phillips curve shown here. When the output gap is 4%:

A)there is insufficient demand. 
B)inflation rises above expected inflation. 
C)unexpected inflation is zero. 
D)the output gap is negative.

Quizplus · Accepted Answer

According to the Phillips curve shown, when the output gap is 4%, the inflation rate is higher than the expected inflation rate. This suggests that there is excessive demand in the economy, which is leading to inflationary pressures. Therefore, the correct answer is B - inflation rises above expected inflation.

Suppose That in a Given Country, the Line of Best