If the unemployment rate falls below the natural rate of unemployment (u*),
A) the government will want to conduct expansionary fiscal policy.
B) the Federal Reserve will want to conduct expansionary monetary policy.
C) the economy is in a recession.
D) there will be no worries about inflation.
E) the government will want to conduct contractionary fiscal policy.

Question

Quizplus · Accepted Answer

When the unemployment rate falls below the natural rate, it can lead to inflationary pressures. To counteract this, the government may conduct contractionary fiscal policy to prevent the economy from overheating.

If the Unemployment Rate Falls Below the Natural Rate of Unemployment