According to the expectations-augmented Phillips curve, when unexpected inflation is positive, unemployment will be:
A) lower than the natural rate.
B) at the natural rate.
C) higher than the natural rate.
D) unpredictable.

Question

Quizplus · Accepted Answer

The expectations-augmented Phillips curve suggests that when inflation is higher than expected, employers can buy labor at a lower real wage (since workers' expectations about inflation lag behind), leading to higher employment and thus lower unemployment than the natural rate.

According to the Expectations-Augmented Phillips Curve, When Unexpected Inflation Is