The natural rate hypothesis implies that _____
A) the policy that results in low inflation is generally the optimal policy in the long run.
B) the policy that results in low inflation is generally the optimal policy in the short run.
C) the policy that results in high inflation is generally the optimal policy in the long run.
D) the policy that results in high inflation is generally the optimal policy in the short run.
E) the policy that results in zero inflation is generally the optimal policy in the short run.

Question

Quizplus · Accepted Answer

The natural rate hypothesis suggests that there is a long-run tradeoff between unemployment and inflation, which means that the policy that results in low inflation is generally the optimal policy in the long run. This is because in the long run the economy will tend to return to its natural rate of unemployment, and policies designed to keep unemployment artificially low will lead to higher inflation. Therefore, the optimal policy in the long run is one that keeps inflation low, which will increase the credibility of monetary policy and anchor long-term inflation expectations.

The Natural Rate Hypothesis Implies That _____