If policymakers want to keep unemployment below the natural rate, they must continually increase aggregate demand so that inflation is always greater than anticipated, thereby setting up an inflationary spiral.

Question

Quizplus · Accepted Answer

This statement is based on the concept of the Phillips Curve, which suggests a short-term trade-off between inflation and unemployment. To keep unemployment below the natural rate (the rate at which the economy is in balance), policymakers would need to boost aggregate demand continuously. This would lead to higher than anticipated inflation, as employers raise wages to attract scarce labor, and workers spend more, fueling an ongoing cycle of demand-pull inflation.

If Policymakers Want to Keep Unemployment Below the Natural Rate