When will the economy be at a point on the expectations-augmented Phillips curve that has an unemployment rate below the natural rate?
A) Inflation is lower than expected.
B) Inflation is higher than expected.
C) Inflation expectations have fallen significantly.
D) Inflation is at the target level.

Question

Quizplus · Accepted Answer

The economy will be at a point on the expectations-augmented Phillips curve with an unemployment rate below the natural rate when inflation is higher than expected. This is because higher-than-expected inflation reduces real wages, encouraging firms to hire more workers, thus lowering unemployment temporarily below its natural rate.

When Will the Economy Be at a Point on the Expectations-Augmented