The analysis of Friedman and Phelps can be summarized in the following equation where a is a positive number:
A)Unemployment Rate = Natural Rate of Unemployment - a(Actual Inflation - Expected Inflation).
B)Unemployment Rate = Natural Rate of Unemployment - a(Expected Inflation - Actual Inflation).
C)Unemployment Rate = Expected Rate of Inflation - a(Actual Inflation - Expected Inflation).
D)Unemployment Rate = Actual Rate of Inflation - a(Actual Unemployment - Expected Unemployment).

Question

Quizplus · Accepted Answer

Friedman and Phelps argued that there is a long-term natural rate of unemployment that is not affected by changes in the inflation rate. Any deviation from this natural rate would be temporary, and the unemployment rate would eventually return to the natural rate. The equation shows that the actual inflation rate minus the expected inflation rate (the inflation surprise) would affect the unemployment rate by a factor of a. A positive surprise in inflation would lead to lower unemployment in the short term, but it would raise inflation expectations, leading to higher inflation and unemployment in the long term. Conversely, a negative surprise in inflation would lead to higher unemployment in the short term, but it would reduce inflation expectations, leading to lower inflation and unemployment in the long term.

The Analysis of Friedman and Phelps Can Be Summarized in the Following