Figure 1-1

-When the actual unemployment rate is likely to exceed the natural rate of unemployment,as in the time intervals between t1 and t2 and t3 and t4 in Figure 1-1 above,we can expect that
A)inflation is speeding up and real GDP is likely to exceed natural GDP.
B)inflation is slowing down and real GDP is likely to fall below natural GDP.
C)inflation is speeding up and natural GDP is likely to exceed real GDP.
D)inflation is slowing down and real GDP is likely to exceed natural GDP.

Question

Figure 1-1
 
-When the actual unemployment rate is likely to exceed the natural rate of unemployment,as in the time intervals between t1 and t2 and t3 and t4 in Figure 1-1 above,we can expect that
A)inflation is speeding up and real GDP is likely to exceed natural GDP. 
B)inflation is slowing down and real GDP is likely to fall below natural GDP. 
C)inflation is speeding up and natural GDP is likely to exceed real GDP. 
D)inflation is slowing down and real GDP is likely to exceed natural GDP.

Quizplus · Accepted Answer

When the actual unemployment rate exceeds the natural rate of unemployment, it indicates that the economy is operating above its potential, leading to upward pressure on wages and prices. This can lead to increases in inflation. To combat inflation, the central bank may raise interest rates, which can lead to a slowdown in economic growth and lower real GDP. Thus, inflation is likely to slow down, and real GDP is likely to fall below natural GDP. Option A is incorrect because inflation is likely to be rising, not slowing down. Option C is incorrect because natural GDP is the level of output that the economy can produce without causing inflation, which is unlikely to exceed real GDP. Option D is incorrect because inflation is likely to be slowing down, not speeding up, and real GDP is likely to be lower than natural GDP.

Figure 1-1 -When the Actual Unemployment Rate Is Likely to Exceed the Likely