When actual inflation exceeds expected inflation ?
Correct answer: D. Unemployment is less than the natural rate of unemployment
- A. Unemployment is equal to the natural rate of unemployment
- B. People will reduce their expectations of inflation in the future
- C. Unemployment is greater than the natural rate of unemployment
- D. Unemployment is less than the natural rate of unemployment
Explanation
If actual inflation exceeds expected inflation, real wages are lower than anticipated, encouraging firms to hire more and reducing unemployment below its natural rate. This is the short-run Phillips-curve trade-off.
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