If policy makers estimate the natural rate of unemployment incorrectly, _____
A) their policies will cause deflation in the long run.
B) their policies will cause even more unemployment in the long run.
C) the economy will stay below its potential GDP in the long run.
D) the economy will tend toward the level of unemployment the policy makers believe is correct.
E) the policies that appear to be successful in the short run will lead to inflation in the long run.

Question

Quizplus · Accepted Answer

If policymakers underestimate the natural rate of unemployment, they may implement expansionary policies that reduce unemployment below its natural rate, leading to inflation in the long run.

If Policy Makers Estimate the Natural Rate of Unemployment Incorrectly