Suppose policymakers estimate the natural rate of unemployment incorrectly and this causes an expansionary gap.Which of the following may happen?

Question

Quizplus · Accepted Answer

If policymakers underestimate the natural rate of unemployment and implement expansionary policy, it can lead to short-term economic growth and job creation. However, in the long run, the economy will reach its potential output level, which is lower than policymakers' estimations. This will lead to inflationary pressures and reduce the effectiveness of expansionary policies, leading to further economic problems such as inflation. Eventually, this can cause an increase in unemployment in the long run. Therefore, choice D is correct.

Suppose Policymakers Estimate the Natural Rate of Unemployment Incorrectly and This