The economy was in long-run equilibrium when aggregate demand increased.At this point in time,the expected inflation has started to adjust to the new higher actual inflation rate.According to the (Friedman)natural rate theory,this means the unemployment rate in the economy must currently be

Question

Quizplus · Accepted Answer

According to the natural rate theory, when actual inflation exceeds expected inflation, the unemployment rate must increase above the natural rate to restore long-run equilibrium. Therefore, with the unexpected increase in aggregate demand causing actual inflation to surpass expected inflation, the unemployment rate must currently be increasing above its natural rate.

The Economy Was in Long-Run Equilibrium When Aggregate Demand Increased