Suppose the natural rate of unemployment is 4 percent. Then suppose that Parliament passes laws that make the labour market less flexible, so the natural rate of unemployment rises to 5 percent. If the sacrifice ratio is 3, how much higher must the inflation rate go in order to keep the unemployment rate at 4 percent in the long run?

Question

Quizplus · Accepted Answer

In the long run, the unemployment rate cannot be kept below the natural rate without causing accelerating inflation. The natural rate of unemployment is determined by structural factors, and attempting to maintain a lower unemployment rate would require continuously increasing inflation.

Suppose the Natural Rate of Unemployment Is 4 Percent