If the expected inflation rate is equal to the actual inflation rate
A)the unemployment rate should be equal to the natural level of unemployment.
B)the unemployment rate should be greater than the natural level of unemployment.
C)the unemployment rate should be less than the natural level of unemployment.
D)the Phillips curve will be unstable.

Question

Quizplus · Accepted Answer

If the expected inflation rate is equal to the actual inflation rate, it implies that there are no surprises in the economy with respect to inflation. In such a scenario, the economy should be at or close to its natural level of unemployment, which is the rate of unemployment that prevails in the long run. This is because when actual inflation matches the expected inflation rate, there is no need for firms and workers to adjust their wage and price expectations. Hence, the aggregate supply and demand are in balance, and the economy operates at its potential output level, which is determined by the natural rate of unemployment.

If the Expected Inflation Rate Is Equal to the Actual