Why Is the Difference Between the Actual and Expected Rates

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The Answer is When the actual rate of inflation is lower than the expected rate of inflation, profits temporarily fall because the prices that firms charge for their products are falling faster than wage rates.(The nominal wage rates were based on a higher expected rate of inflation than actually existed.) With less revenue, firms cannot afford to employ as many workers so the unemployment rate temporarily rises.In the long run, firms and workers adjust their expectations to the new lower rate of inflation.This means that the increase in nominal wages falls and the profits of firms rise.Firms can afford to hire more workers, so the unemployment rate falls and returns to its natural rate.

Why Is the Difference Between the Actual and Expected Rates

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