Suppose policymakers think the natural rate of unemployment is lower than it really is, therefore policies such as increasing aggregate demand are designed to move the economy to the estimated natural rate.If the policies are continued over the long run, what will be the result?

Question

Quizplus · Accepted Answer

If policymakers continue to believe the natural rate of unemployment is lower than it actually is and persist in implementing policies that increase aggregate demand, the economy may eventually reach a point where it is producing beyond its potential. This can lead to sustained inflation as firms may not be able to meet the increased demand for goods and services with their current resources, leading to higher prices.

Suppose Policymakers Think the Natural Rate of Unemployment Is Lower