Consider an economy that always managed to keep its unemployment rate
A) inflation to climb by some additional fixed amount in the foreseeable future.
B) inflation to converge to some fixed rate sometime in the foreseeable future.
C) inflation to accelerate without bound as the future proceeds.
D) inflation to be affected only slightly by the slight overemployment of labor.
E) nothing from the insufficient information provided.

Question

Quizplus · Accepted Answer

The scenario described is consistent with the concept of the Phillips curve, which suggests a trade-off between inflation and unemployment. If an economy always manages to keep its unemployment rate very low (implying overemployment), according to the Phillips curve, this would lead to higher inflation. However, the concept of accelerating inflation comes from the expectations-augmented Phillips curve, which suggests that if unemployment is kept below the natural rate for too long, it could lead to continuously accelerating inflation, as people begin to expect higher inflation and demand higher wages, leading to a wage-price spiral.

Consider an Economy That Always Managed to Keep Its Unemployment