Assume that last year's inflation rate is the same as the expectation of inflation for the next year. According to the expectations Phillips curve, if the inflation rate increases relative to the expected rate, the unemployment rate
A) decreases.
B) increases.
C) may increase or decrease.
D) does not change.

Question

Quizplus · Accepted Answer

According to the expectations Phillips curve, if the actual inflation rate is higher than the expected inflation rate, it typically leads to lower unemployment rates. This is because higher-than-expected inflation can temporarily make labor cheaper for employers, encouraging them to hire more workers, thus reducing unemployment.

Assume That Last Year's Inflation Rate Is the Same as the Expectation