CFA Practice Question
According to the modern view of the Phillips curve, if actual inflation is 6% while the expected inflation was 5%, the most likely initial effect is that ______
A. the natural rate of unemployment will fall.
B. unemployment will fall below its natural rate.
C. unemployment will rise above its natural rate.
Explanation: There is a short-run trade-off between inflation and unemployment.
User Contributed Comments 4
| User | Comment |
|---|---|
| polanki | Unemployment has to increase with decrease in inflation. isn't it? |
| achoi0 | polanki: Short-run Phillips curve says that if inflation is higher than expected, there is a decrease in unemployment. |
| siggarusfigs | When expected inflation<actual inflation there's a decline in real wages, so unemployment decreases (inverse relationship between wages and employment) |
| DustinErik | nice explanation siggarus figs |