Suppose that members of Congress and the President believe that the natural rate of unemployment is 2% but in fact it is 6%,and employing fiscal policy they increase AD each time unemployment rises above 2%.The underestimation of the natural rate combined with adaptive expectations will

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The underestimation of the natural rate of unemployment will lead to continuous attempts to increase AD to reduce unemployment, causing inflation. Adaptive expectations mean that people will adjust their expectations of inflation, causing the SAS to shift as well, leading to continuous inflation.

Suppose That Members of Congress and the President Believe That