According to the equation for the Phillips curve, if wages increase by 5% and productivity decreases by 2%, then inflation will be

Question

Quizplus · Accepted Answer

The Phillips curve equation is expressed as:
Inflation = Expected Inflation Rate + a(Actual Unemployment Rate - Natural Unemployment Rate) - b(Actual Productivity Growth - Expected Productivity Growth)
If wages increase by 5% and productivity decreases by 2%, then actual productivity growth will be -2%. Assuming expected productivity growth remains the same, we can substitute the values into the Phillips curve equation:
Inflation = Expected Inflation Rate + a(Actual Unemployment Rate - Natural Unemployment Rate) - b(-2% - Expected Productivity Growth)
Since the question does not provide information on the unemployment rate, we cannot determine the exact value of inflation. However, we can conclude that inflation will increase due to the negative value of -b. Therefore, the best choice is option C) 7%.

According to the Equation for the Phillips Curve, If Wages