If the actual unemployment rate is below the natural rate, we would expect that:
A) the inflation rate is decreasing.
B) the inflation rate is constant.
C) the inflation rate is zero.
D) the inflation rate is increasing.

Question

Quizplus · Accepted Answer

When the actual unemployment rate falls below the natural rate, it means that there are fewer workers available than the demand for labor. This leads to firms having to increase wages in order to attract workers which, in turn, can cause inflation to increase. Therefore, we would expect the inflation rate to increase.

If the Actual Unemployment Rate Is Below the Natural Rate