When inflation is lower than expected and production is lower 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 production is lower than potential output, it typically means that not all resources (including labor) are being fully utilized. This underutilization of labor leads to a higher unemployment rate, which would be above the natural rate of unemployment. The natural rate of unemployment is the level that would be expected in an economy that is producing at its potential output. Lower than expected inflation does not directly affect the natural rate of unemployment but can influence monetary policy responses.

When Inflation Is Lower Than Expected and Production Is Lower