The theory that when inflation expectations adjust to actual inflation, the rate of unemployment returns to the natural rate is known as the:
A) Phillips curve theory.
B) natural rate hypothesis.
C) rational expectations hypothesis.
D) internal-correcting theory.

Question

Quizplus · Accepted Answer

The natural rate hypothesis posits that the unemployment rate eventually returns to its natural rate, regardless of the rate of inflation, as people adjust their expectations about inflation. This concept contrasts with the Phillips curve, which suggests a trade-off between inflation and unemployment.

The Theory That When Inflation Expectations Adjust to Actual Inflation