Use the table below to answer the following questions.
Table 28.4.1

-Refer to Table 28.4.1. The table gives points on the short-run Phillips curve for the country of Ruritania. If the expected inflation rate is 10 percent, and the inflation rate unexpectedly rises to 12 percent and stays there for some period of time, the expected inflation rate becomes ________ percent and the natural unemployment rate is ________ percent.
A)12; 4
B)10; 4
C)10; 6
D)12; 6
E)12; 5

Question

Use the table below to answer the following questions.
Table 28.4.1
 
-Refer to Table 28.4.1. The table gives points on the short-run Phillips curve for the country of Ruritania. If the expected inflation rate is 10 percent, and the inflation rate unexpectedly rises to 12 percent and stays there for some period of time, the expected inflation rate becomes ________ percent and the natural unemployment rate is ________ percent.
A)12; 4 
B)10; 4 
C)10; 6 
D)12; 6 
E)12; 5

Quizplus · Accepted Answer

According to the short-run Phillips curve in the table, an unexpected increase in inflation of 2 percentage points leads to a decrease in unemployment rate of 2 percentage points. Therefore, in the short run, the natural unemployment rate falls from 6 percent to 4 percent. However, this increase in inflation would affect the expectations of consumers and firms, who would now expect inflation to be 12 percent. Therefore, the expected inflation rate becomes 12 percent. The correct answer is D, which has both of these values.

Use the Table Below to Answer the Following Questions