When the actual rate of inﬂation exceeds the expected rate
A) the unemployment rate will temporarily rise.
B) ﬁrms will experience rising proﬁts and thus increase their employment.
C) the actual rate of inﬂation will fall.
D) nominal wages will decline.

Question

Quizplus · Accepted Answer

When the actual rate of inflation exceeds the expected rate, firms often experience temporarily higher profits because they can increase prices faster than their costs rise (including wages). This can lead to increased employment as firms expand production in response to the higher profit margins.

When the Actual Rate of Inﬂation Exceeds the Expected Rate