If the inflation rate unexpectedly increases, it is likely that workers will not fully anticipate some of this sudden increase. This will cause
A) anticipated inflation to exceed actual inflation.
B) actual inflation to exceed anticipated inflation.
C) anticipated inflation to equal actual inflation.
D) nominal inflation to exceed real inflation.

Question

Quizplus · Accepted Answer

When the inflation rate unexpectedly increases, workers would not have factored in the sudden increase in their wage demands, which leads to an increase in the cost of production. The firms will try to recover this added cost of production by increasing the prices of the goods, leading to an increase in actual inflation. The workers' expectation of inflation will not change immediately, thereby causing actual inflation to exceed anticipated inflation.

If the Inflation Rate Unexpectedly Increases, It Is Likely That