Question 35 Suppose this year's inflation rate is 4 percent, which is greater than the 2 percent everyone expected. Which of the following is true? (1) the unemployment rate will probably rise (3) potential output will remain the same (4) there will be a leftward movement along a given short-run aggregate supply curve (5) the short-run aggregate supply curve will shift to the right (3) (2)

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1. Let the expected inflation rate be $$ \pi^{e}=2\%$$ and the actual inflation rate be $$ \pi=4\%$$.
2. In the short run, many prices and wages are sticky. When actual inflation exceeds expected inflation, firms suddenly find that the price level is higher than anticipated. This reduces real wages (since nominal wages are slow to adjust) and thereby increases production.
3. The increased production is explained as a movement along the short‐run aggregate supply (SRAS) curve rather than a shift of the curve. The SRAS curve is upward‐sloping because of delayed adjustments in wages and prices.
4. However, the misperception or sticky wage effect, which leads to higher output in the short run, does not change the economy’s long‐run productive capacity. The potential output, determined by available resources, technology, and institutional factors, remains unchanged by differences between actual and expected inflation.
5. Therefore, among the given options, the correct statement is that

$$
\text{potential output will remain the same.}
$$

Thus, the correct answer is option (3).
Potential output will remain the same.

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