Suppose policy makers underestimate the natural rate of unemployment.In a situation like this,policy makers might implement a policy that

Question

Quizplus · Accepted Answer

If policy makers underestimate the natural rate of unemployment and implement policies that increase output beyond the natural level, it will cause a labor shortage, leading to wage increases and higher production costs, resulting in steadily rising inflation. Therefore, the best choice is D. Options A and B are incorrect because they suggest restricting output or deflation, which are not the likely outcomes of an incorrect estimation of the natural rate of unemployment.

Suppose Policy Makers Underestimate the Natural Rate of Unemployment