Based on your understanding of the Phillips curve, explain what happens to actual inflation (relative to expected inflation) when the actual unemployment rate is either above or below the natural rate of unemployment?

The concept of the Philips curve was given by A. W Philips. It states that economic growth is related to employment growth and inflation. In other words, as the economy expands, the more jobs will be created and unemployment will decline but the inflation will increase.

So there is a kind of trade-off between inflation and unemployment.

When the unemployment rate is lower than the natural rate of unemployment the inflation is higher than expected. There is an inverse relationship between unemployment and inflation which is indicated by a downward-sloping demand curve.

When unemployment will be higher or above the natural rate the actual inflation will be lower than expected.