According to the natural rate hypothesis, if the economy begins at full employment with an unemployment rate of 5 percent and then the inflation rate increases from 2 percent to 4 percent, then the economy will
A) have lower unemployment but then return to its natural rate with an inflation rate of 4 percent.
B) stay at the 4 percent inflation rate and the natural unemployment rate will fall.
C) not see any lower unemployment, even temporarily, just higher inflation.
D) eventually return to its natural rate of 2 percent inflation and a new lower unemployment rate.
E) eventually return to its natural rate of 2 percent inflation and its natural unemployment rate of 5 percent.

Question

Quizplus · Accepted Answer

According to the natural rate hypothesis, an increase in inflation can temporarily reduce unemployment below its natural rate, but eventually, unemployment will return to its natural rate, even if inflation remains higher.

According to the Natural Rate Hypothesis, If the Economy Begins