Assume that last year's inflation rate is the same as the expectation of inflation for the next year. According to the expectations Phillips curve, if the inflation rate decreases relative to the expected rate, the unemployment rate
A) decreases.
B) increases.
C) may increase or decrease.
D) does not change.

Question

Quizplus · Accepted Answer

According to the expectations Phillips curve, if the actual inflation rate is lower than the expected inflation rate, the unemployment rate increases. This is because lower-than-expected inflation typically means that real wages are higher than employers anticipated, leading them to hire fewer workers.

Assume That Last Year's Inflation Rate Is the Same as the Expectation