In the Expectations-augmented Phillips curve equation, which of the following will NOT cause a rise in the current inflation rate?Group of answer choicesAll other options lead to a rise in current inflation rateAn increase in markup rate charged by the firmsA drop in unemployment rateAn increase in the NAIRU
Question
In the Expectations-augmented Phillips curve equation, which of the following will NOT cause a rise in the current inflation rate?Group of answer choicesAll other options lead to a rise in current inflation rateAn increase in markup rate charged by the firmsA drop in unemployment rateAn increase in the NAIRU
Solution
The option that will NOT cause a rise in the current inflation rate in the Expectations-augmented Phillips curve equation is "A drop in unemployment rate".
Here's why:
The Expectations-augmented Phillips curve equation is a concept in economics that describes the relationship between inflation and unemployment. According to this theory, there is a trade-off between inflation and unemployment - when unemployment is high, inflation is low and vice versa.
So, if the unemployment rate drops, it means more people are getting jobs. This would increase the supply of goods and services in the economy, which could potentially lead to a decrease in inflation.
On the other hand, an increase in the markup rate charged by firms or an increase in the NAIRU (Non-Accelerating Inflation Rate of Unemployment) would lead to a rise in the current inflation rate.
Therefore, a drop in the unemployment rate will not cause a rise in the current inflation rate according to the Expectations-augmented Phillips curve equation.
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