Consider an economy that is operating at the intersection of the long-run and short-run Phillips curve. The level of inﬂation is 2.5 per cent, while the level of unemployment is 3.8 per cent. This implies that:
A) the economy is operating at a point inside its production possibility frontier.
B) any increase in interest rates at this point will move the economy up along the short-run
C) any increase in aggregate demand at this point will move the economy down along the short-run Phillips curve.
D) the natural rate of unemployment in this economy is 3.8 per cent.

Question

Quizplus · Accepted Answer

When an economy is operating at the intersection of the long-run and short-run Phillips curve, it is at its natural rate of unemployment. The given level of unemployment (3.8%) is thus the natural rate in this context.

Consider an Economy That Is Operating at the Intersection of the Long-Run