Increases in unanticipated inflation will impact employment levels, but once workers recognize higher inflation rates, they will incorporate them into their expectations of inflation. This will tend to cause
A) unemployment to fall below the natural rate.
B) unemployment to return to its natural rate.
C) the natural rate of unemployment to rise.
D) the natural rate of unemployment to fall.

Question

Quizplus · Accepted Answer

Unanticipated inflation can cause temporary distortions in the labor market, leading to changes in employment levels. However, once workers realize that inflation rates have increased, they will adjust their expectations accordingly. This adjustment will cause unemployment to return to its natural rate, as workers and firms renegotiate wages and prices. Therefore, the correct answer is option B.

Increases in Unanticipated Inflation Will Impact Employment Levels, but Once