If the economy is at potential output, and people's expectations about inflation is correct, then the actual inflation:
A) equals expected inflation.
B) is less than expected inflation.
C) is greater than expected inflation.
D) equals the natural rate of unemployment.

Question

Quizplus · Accepted Answer

If the economy is at potential output, it means that the economy is producing at its maximum capacity with full employment. If people's expectations about inflation are correct, then the actual inflation should be equal to the expected inflation. This is because the economy is not experiencing any supply-side shocks that would cause the actual inflation to deviate from the expected inflation. Therefore, the correct answer is A) equals expected inflation.

If the Economy Is at Potential Output, and People's Expectations