According to the natural rate hypothesis:
A)a short-term as well as long-term trade-off exists between unemployment and inflation.
B)economic fluctuations are the result of external negative and positive productivity shocks to the economy
C)workers and consumers incorporate the likely consequences of government policy changes into their expectations by quickly adjusting wages and prices.
D)the economy will self-correct to the natural rate of unemployment.

Question

According to the natural rate hypothesis:
A)​a short-term as well as long-term trade-off exists between unemployment and inflation.
B)​economic fluctuations are the result of external negative and positive productivity shocks to the economy
C)​workers and consumers incorporate the likely consequences of government policy changes into their expectations by quickly adjusting wages and prices.
D)​the economy will self-correct to the natural rate of unemployment.

Quizplus · Accepted Answer

The natural rate hypothesis suggests that the economy will self-correct to the natural rate of unemployment, meaning that in the long run, the economy will always converge back to its natural rate of unemployment, which is determined by non-monetary factors like demographics, technology, and institutional factors. It implies that any attempts to reduce unemployment below this natural rate will eventually lead to higher inflation, while any policy measures to decrease inflation below a certain level will cause increases in unemployment.

According to the Natural Rate Hypothesis