Which of these choices is correct? Holding all else equal, assuming no supply-side shock, the:
A)lower the unemployment rate, the higher the unexpected inflation.
B)lower the unemployment rate, the lower the unexpected inflation.
C)higher the unemployment rate, the higher the unexpected inflation.
D)more positive the output gap, the higher the unemployment rate.

Question

Quizplus · Accepted Answer

According to the Phillips Curve, there exists an inverse relationship between the unemployment rate and inflation. Therefore, as the unemployment rate decreases (holding all else constant), there is upward pressure on wages that ultimately leads to higher prices and unexpected inflation.

Which of These Choices Is Correct? Holding All Else Equal