Suppose we know the following information about a hypothetical economy: - real GDP = $945 billion
- potential GDP = $900 billion
- inflation rate = 3%
If the central bank conducts monetary policy in an attempt to keep the unemployment rate below the NAIRU,the inflation rate is likely to

Question

Quizplus · Accepted Answer

If the central bank tries to keep unemployment below the NAIRU, it will increase aggregate demand and push the economy beyond its potential output level. This will lead to an increase in the inflation rate above its current 3% level. Therefore, the inflation rate is likely to rise above 3%.

Suppose We Know the Following Information About a Hypothetical Economy