When the economy is at potential GDP, the unexpected inflation rate is _____, and the unemployment rate is equal to _____.
A)zero; potential output
B)2%; cyclical
C)zero; the natural rate of unemployment
D)2%; the non-accelerating inflation rate of unemployment (NAIRU)

Question

Quizplus · Accepted Answer

When the economy is at potential GDP, there is no output gap, meaning there is no excess demand or supply in the economy. Therefore, there is no pressure on prices to increase, hence there is no unexpected inflation. The unemployment rate at potential GDP is the natural rate of unemployment, which is the rate of unemployment that exists when the economy is at full employment and there is no cyclical unemployment.

When the Economy Is at Potential GDP, the Unexpected Inflation