When inflation is higher than expected and production is higher than potential output
A) the unemployment rate will be lower than the natural rate of unemployment.
B) the unemployment rate will be higher than the natural rate of unemployment.
C) the interest rate will be higher than the natural interest rate.
D) the exchange rate will be higher than the natural exchange rate.

Question

Quizplus · Accepted Answer

When inflation is higher than expected and production is higher than potential output, it typically indicates an overheated economy. In such scenarios, employers demand more labor to meet the high production levels, which reduces unemployment below the natural rate of unemployment. This is because the natural rate of unemployment is the level of unemployment consistent with sustainable economic activity, without accelerating inflation.

When Inflation Is Higher Than Expected and Production Is Higher