According to the modern expectational Phillips curve, unemployment will temporarily rise above the natural rate of unemployment when
A) any inflation is present.
B) inflation turns out to be lower than what people expected.
C) inflation turns out to be higher than what people expected.
D) inflation turns out to be equal to what people expected.

Question

Quizplus · Accepted Answer

According to the modern expectational Phillips curve, when inflation turns out to be lower than what people expected, unemployment will temporarily rise above the natural rate of unemployment. This is because lower than expected inflation means that firms are not able to increase prices as much as they anticipated, which reduces their profits and causes them to reduce hiring or even lay off workers. As a result, unemployment rises above the natural rate in the short run until firms are able to adjust their expectations and re-hire workers.

According to the Modern Expectational Phillips Curve, Unemployment Will Temporarily