When the actual rate of inﬂation is less than the expected rate,
A) the unemployment rate will temporarily rise.
B) ﬁrms will increase their output to recoup their falling proﬁts.
C) the unemployment rate will temporarily fall.
D) ﬁrms will experience rising proﬁts and thus increase their employment.

Question

Quizplus · Accepted Answer

When the actual rate of inflation is less than the expected rate, firms face higher real wages than anticipated because they set prices based on the expected inflation. This can lead to a temporary increase in unemployment as firms adjust to the higher cost of labor.

When the Actual Rate of Inﬂation Is Less Than the Expected