If the actual rate of inflation exceeds the expected rate of inflation,the actual real wage is greater than the expected real wage and unemployment falls.

Question

Quizplus · Accepted Answer

If the actual rate of inflation exceeds the expected rate of inflation, it means prices are rising faster than people anticipated. This reduces the purchasing power of money and causes the actual real wage to be lower than the expected real wage. In turn, this can lead to an increase in unemployment as firms may reduce their workforce or cut back on hiring if they face higher wage costs.

If the Actual Rate of Inflation Exceeds the Expected Rate