Suppose policy makers underestimate the natural rate of unemployment. In such situations, policy makers will likely implement policies that result in:

Question

Quizplus · Accepted Answer

When policy makers underestimate the natural rate of unemployment, they are likely to implement expansionary monetary and fiscal policies in an attempt to reduce unemployment below its natural rate. This can lead to demand-pull inflation, resulting in a higher inflation rate than necessary.

Suppose Policy Makers Underestimate the Natural Rate of Unemployment