CFA Practice Question

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
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