Suppose Venezuela experiences economic expansion in 2013, yet its unemployment rate is 15 percent, and economists have estimated that the natural rate of unemployment in Venezuela is also approximately 15 percent. All else equal, if this is the case, what will tend to happen in the Venezuelan economy over time?
A) Wages and prices will fall.
B) Wages and prices will rise.
C) Wages will rise and prices will fall.
D) Wages and prices will remain close to their current levels.

Question

Quizplus · Accepted Answer

If Venezuela is experiencing economic expansion with an unemployment rate equal to its natural rate, it suggests that the output gap is zero, meaning that there is neither inflationary nor deflationary pressure on the economy. Therefore, wages and prices are likely to remain close to their current levels over time.

Suppose Venezuela Experiences Economic Expansion in 2013, Yet Its Unemployment