If the unemployment rate initially equals its natural rate, then if the inflation rate rises above its expected rate, the unemployment rate
A) equals the natural rate.
B) remains constant.
C) falls below its natural rate.
D) rises above its natural rate.

Question

Quizplus · Accepted Answer

According to the short-run Phillips curve, if the inflation rate rises above its expected rate, the actual unemployment rate falls below the natural rate of unemployment. This is because higher than expected inflation can temporarily boost employment as prices adjust faster than wages.

If the Unemployment Rate Initially Equals Its Natural Rate, Then