Suppose an economy experiences several years of falling inflation rates.Which of the following would best explain this phenomenon?
A) Unemployment is probably at the natural rate.
B) The unemployment rate must be rising.
C) The unemployment rate must be below the natural rate.
D) The unemployment rate is probably above the natural rate.

Question

Suppose an economy experiences several years of falling inflation rates.Which of the following would best explain this phenomenon?  
A) Unemployment is probably at the natural rate. 
B) The unemployment rate must be rising. 
C) The unemployment rate must be below the natural rate. 
D) The unemployment rate is probably above the natural rate.

Quizplus · Accepted Answer

Falling inflation rates over several years are often associated with an unemployment rate that is above the natural rate. This situation suggests that the economy might be experiencing slack, with less pressure on prices to rise. According to the Phillips Curve, higher unemployment typically leads to lower inflation.

Suppose an Economy Experiences Several Years of Falling Inflation Rates