According to the natural rate hypothesis:
A)once inflation is built into expectations, a policy aimed at lowering unemployment below the natural rate would lead to accelerating inflation.
B)the natural rate of unemployment is above the NAIRU.
C)once inflation is embedded in the public's expectations, it will stop accelerating.
D)changes in discretionary policy aimed at increasing GDP will have no impact on inflation expectations.

Question

Quizplus · Accepted Answer

The natural rate hypothesis suggests that there is a natural rate of unemployment in the economy, below which inflation will accelerate. Once inflation is built into expectations, attempting to lower unemployment below the natural rate through policy will only increase inflation further. Therefore, choice A is the best answer.

According to the Natural Rate Hypothesis