If the inflation rate is lower than the expected inflation rate,
A)unemployment is below the natural rate.
B)unemployment is above the natural rate.
C)the natural unemployment rate will increase.
D)the expected inflation rate will increase.
E)the economy is not operating on the short- run Phillips curve.

Question

Quizplus · Accepted Answer

The Phillips curve shows an inverse relationship between inflation and unemployment. If the inflation rate is lower than the expected inflation rate, this means there is still slack in the economy and unemployment is likely to be above the natural rate. This is because firms are not yet feeling the pressure to increase wages and prices due to excess labor supply. Therefore, the economy is operating on a point above the short-run Phillips curve, where there is higher unemployment and lower inflation than expected.

If the Inflation Rate Is Lower Than the Expected Inflation