The natural rate hypothesis states that if policymakers choose higher inflation in order to reduce unemployment below the natural rate, they will succeed at reducing unemployment permanently.

Question

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The natural rate hypothesis posits that there is a certain level of unemployment that the economy will tend towards in the long run, regardless of the level of inflation. If policymakers try to reduce unemployment below this natural rate by increasing inflation, the benefits will be temporary and eventually lead to even higher inflation without reducing unemployment. Therefore, choosing higher inflation to reduce unemployment permanently is not a viable option according to the natural rate hypothesis.

The Natural Rate Hypothesis States That If Policymakers Choose Higher