According to Friedman and Phelps,the unemployment rate
A)is never below its natural rate.
B)is below its natural rate when actual inflation is greater than expected inflation.
C)is below its natural rate when actual inflation is less than expected inflation.
D)is below its natural rate when actual inflation equals expected inflation.

Question

Quizplus · Accepted Answer

According to the Friedman-Phelps hypothesis, the unemployment rate can be below its natural rate only when actual inflation is greater than expected inflation. This is because workers and firms have adaptive expectations where they anticipate inflation based on past experience. When actual inflation is higher than expected, workers and employers negotiate for higher wages, leading to an increase in overall prices and inflation. In the long run, this leads to an increase in the natural rate of unemployment as workers become more hesitant to accept job offers that offer wages lower than their increased cost of living. Therefore, the only time the unemployment rate can be below its natural rate is when actual inflation exceeds expected inflation, as the opposite would lead to deflation and a decrease in the natural rate of unemployment.

According to Friedman and Phelps,the Unemployment Rate