If the Reserve Bank lowers the inflation rate and initially expected inflation does not change, in the short run the unemployment rate ________, and in the long run the unemployment rate ________ the natural unemployment rate.
A) falls; is equal to
B) rises; is greater than
C) does not change; is greater than
D) rises; is equal to
E) does not change; is equal to

Question

Quizplus · Accepted Answer

In the short run, if the Reserve Bank lowers the inflation rate and initially expected inflation does not change, firms and workers may be caught off guard, leading to a temporary rise in unemployment as the economy adjusts. However, in the long run, expectations adjust, and the unemployment rate returns to the natural rate of unemployment, which is determined by the structure and dynamics of the labor market, not by the inflation rate.

If the Reserve Bank Lowers the Inflation Rate and Initially