If people have adaptive expectations, the Phillips curve model implies that whenever the actual rate of inflation is higher than the expected rate of inflation:
A)unemployment will exceed its natural rate.
B)unemployment will be less than its natural rate.
C)unemployment will increase.
D)unemployment will decrease.

Question

If people have adaptive expectations, the Phillips curve model implies that whenever the actual rate of inflation is higher than the expected rate of inflation:
A)​unemployment will exceed its natural rate.
B)​unemployment will be less than its natural rate.
C)​unemployment will increase.
D)​unemployment will decrease.

Quizplus · Accepted Answer

When the actual rate of inflation is higher than the expected rate of inflation, employers can pay relatively lower real wages (since the value of money is decreasing faster than anticipated), which can lead to higher demand for labor, thus reducing unemployment below its natural rate.

If People Have Adaptive Expectations, the Phillips Curve Model Implies