According to Friedman and Phelps, when is the unemployment rate below the natural rate?
A) when actual inflation is greater than expected inflation
B) when actual inflation is less than expected inflation
C) when actual inflation equals expected inflation
D) when actual inflation is low

Question

Quizplus · Accepted Answer

When actual inflation is greater than expected inflation, employers can pay lower real wages than workers were expecting, which can temporarily increase employment and reduce the unemployment rate below the natural rate. This is because workers' purchasing power is eroded by the higher-than-expected inflation, making real wages lower than anticipated.

According to Friedman and Phelps, When Is the Unemployment Rate