The structural unemployment rate is 1.7 percent,the frictional unemployment rate is 2.6 percent,and the economy's current unemployment rate is 3.9 percent.The economy is in
A) a recessionary gap producing less than Natural Real GDP.
B) an inflationary gap producing more than Natural Real GDP.
C) long-run equilibrium.
D) an inflationary gap producing Natural Real GDP.
E) a recessionary gap producing more than Natural Real GDP.

Question

Quizplus · Accepted Answer

The economy is in an inflationary gap because the current unemployment rate (3.9%) is lower than the sum of the structural (1.7%) and frictional (2.6%) unemployment rates, which together make up the natural rate of unemployment (4.3%). This indicates that the economy is producing more than its Natural Real GDP, leading to upward pressure on prices, or inflation.

The Structural Unemployment Rate Is 1