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Category - Economics

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Despite the unemployment rate hovering around 9.8% in the United States for the past 18 months, the rate of inflation has increased. The main reason for this inflation increase is:
  1. an expectation of higher inflation
  2. an expectation of higher unemployment
  3. an expectation of lower prices
  4. an expectation of lower interest rates
Explanation
Answer: A - The main reason for this inflation increase is an expectation of higher inflation.

Key Takeaway: Despite an unemployment rate remaining constant, inflation rates increase due to an expectation of higher inflation in the future. Employers set a higher nominal wage in response to this expectation which, in turn, leads to an increase in price levels. This increase in price levels leads to a real increase in inflation rates.
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