Refer to the above diagram.Assume that the natural rate of unemployment is 7.5 percent and that the economy is initially operating at point a where the expected and actual rates of inflation are each 6 percent.If the actual rate of inflation unexpectedly falls from 6 percent to 4 percent, then the unemployment rate will:
A)temporarily fall from 7.5 percent to 4 percent.
B)permanently fall from 7.5 percent to 4 percent.
C)temporarily rise from 7.5 percent to 9.5 percent.
D)permanently rise from 7.5 percent to 9.5 percent.

Question

Refer to the above diagram.Assume that the natural rate of unemployment is 7.5 percent and that the economy is initially operating at point a where the expected and actual rates of inflation are each 6 percent.If the actual rate of inflation unexpectedly falls from 6 percent to 4 percent, then the unemployment rate will:
A)temporarily fall from 7.5 percent to 4 percent. 
B)permanently fall from 7.5 percent to 4 percent. 
C)temporarily rise from 7.5 percent to 9.5 percent. 
D)permanently rise from 7.5 percent to 9.5 percent.

Quizplus · Accepted Answer

According to the Phillips curve, there is an inverse relationship between inflation and unemployment, meaning that when inflation falls, unemployment should temporarily rise. Therefore, the unemployment rate will temporarily rise from the natural rate of 7.5 percent to 9.5 percent. The change in inflation is not significant enough to permanently change the natural rate of unemployment.

Refer to the Above Diagram