An unanticipated reduction in the rate of inflation is expected to:
A)reduce the unemployment rate in the short run,but not in the long run
B)reduce the unemployment rate in the both the short run and the long run
C)increase the unemployment rate in the short run,but not in the long run
D)have very little impact on the unemployment rate in either the short run or the long run

Question

Quizplus · Accepted Answer

An unanticipated reduction in inflation can lead to higher real wages if nominal wages are sticky, causing firms to reduce hiring, thus increasing unemployment in the short run. In the long run, wages adjust, and unemployment returns to its natural rate.

An Unanticipated Reduction in the Rate of Inflation Is Expected