According to the natural rate hypothesis, what does the economy tend toward?
A) the natural rate of unemployment in the long run
B) the natural rate of unemployment in the short run
C) potential output in the short run
D) a stable trade-off between inflation and unemployment in the long run

Question

According to the natural rate hypothesis, what does the economy tend toward?  
A) the natural rate of unemployment in the long run 
B) the natural rate of unemployment in the short run 
C) potential output in the short run 
D) a stable trade-off between inflation and unemployment in the long run

Quizplus · Accepted Answer

According to the natural rate hypothesis, the economy tends toward the natural rate of unemployment in the long run. This is the level of unemployment consistent with steady inflation and potential output. In the short run, the economy may deviate from this natural rate due to various shocks, but over time it will adjust back to the natural rate.

According to the Natural Rate Hypothesis, What Does the Economy