According to the natural rate hypothesis, at what cost can unemployment be maintained below the natural rate?
A) Unemployment can be maintained below the natural rate only at the cost of negative net exports.
B) Unemployment can be maintained below the natural rate only at the cost of higher taxes.
C) Unemployment can be maintained below the natural rate only at the cost of ever-increasing inflation.
D) Unemployment can be maintained below the natural rate only at the cost of ever-increasing federal budget deficits.

Question

According to the natural rate hypothesis, at what cost can unemployment be maintained below the natural rate?  
A) Unemployment can be maintained below the natural rate only at the cost of negative net exports. 
B) Unemployment can be maintained below the natural rate only at the cost of higher taxes. 
C) Unemployment can be maintained below the natural rate only at the cost of ever-increasing inflation. 
D) Unemployment can be maintained below the natural rate only at the cost of ever-increasing federal budget deficits.

Quizplus · Accepted Answer

The natural rate hypothesis suggests that maintaining unemployment below the natural rate is possible only with accelerating inflation. This is because attempts to keep unemployment too low can lead to demand-pull inflation, as aggregate demand exceeds the economy's productive capacity.

According to the Natural Rate Hypothesis, at What Cost Can