An alternative way of stating the content of the expectations-augmented Phillips curve is to assert that
A) the difference between actual and expected inflation should be positively correlated with the percentage) difference between actual and potential GDP.
B) the difference between actual and expected inflation should be negatively correlated with the difference between actual and potential GDP.
C) the difference between wage and price inflation should be positively correlated with the difference between actual and potential GDP.
D) the difference between wage and price inflation should be zero regardless of the difference between actual and potential GDP.
E) none of the above.

Question

Quizplus · Accepted Answer

The expectations-augmented Phillips curve suggests that when actual GDP exceeds potential GDP (indicating an overheated economy), inflation will tend to be higher than expected, leading to a positive correlation between the difference in actual and expected inflation and the percentage difference between actual and potential GDP.

An Alternative Way of Stating the Content of the Expectations-Augmented