When persons underestimate inflation (when actual inflation exceeds the expected rate), actual unemployment will
A) exceed the natural rate of unemployment.
B) equal the natural rate of unemployment.
C) fall below the natural rate of unemployment.
D) increase if the government is running a budget deficit and decrease if a budget surplus is present.

Question

Quizplus · Accepted Answer

When actual inflation exceeds expected inflation, firms and workers are caught off guard, leading to lower real wages than anticipated. This can result in firms hiring more workers, thus reducing unemployment below the natural rate.

When Persons Underestimate Inflation (When Actual Inflation Exceeds the Expected