What does the natural rate hypothesis state about the long run?
A) Economic policy can reduce inflation and unemployment.
B) The economy's natural rate of annual growth is approximately 3 percent.
C) Monetary and fiscal policies have their greatest effect on the rate of unemployment.
D) The economy tends toward the natural rate of unemployment.

Question

What does the natural rate hypothesis state about the long run?  
A) Economic policy can reduce inflation and unemployment. 
B) The economy's natural rate of annual growth is approximately 3 percent. 
C) Monetary and fiscal policies have their greatest effect on the rate of unemployment. 
D) The economy tends toward the natural rate of unemployment.

Quizplus · Accepted Answer

The natural rate hypothesis states that in the long run, the economy tends toward the natural rate of unemployment, which is the rate of unemployment that exists when the economy is at full employment and there is no cyclical unemployment. Therefore, choice D is the correct answer. Choice A is incorrect because the natural rate hypothesis does not imply that economic policy can reduce both inflation and unemployment in the long run. Choice B is incorrect because while the natural rate hypothesis does suggest that the economy's long-run growth rate is relatively stable, it does not specify that it is exactly 3%. Choice C is incorrect because the natural rate hypothesis suggests that monetary and fiscal policies have their greatest impact on inflation, not unemployment.

What Does the Natural Rate Hypothesis State About the Long