According to the equation for the Phillips curve, if wages increase by 3% and productivity increases by 5%, then inflation will be

Question

Quizplus · Accepted Answer

The Phillips curve equation states that inflation is inversely related to the unemployment rate and positively related to the growth rate of wages. However, productivity growth reduces costs for firms, which then have less incentive to raise prices, which in turn reduces inflation. Therefore, if wages increase by 3% but productivity increases by 5%, the overall effect on inflation should be a decrease. A 2% decrease in inflation would be the most likely outcome. Therefore, the correct answer is B: -2%.

According to the Equation for the Phillips Curve, If Wages