According to the natural-rate hypothesis, output will be at the natural rate:
A) if inflation exceeds expected inflation.
B) if inflation falls below expected inflation.
C) in the long run.
D) if aggregate demand affects output in the long run.

Question

Quizplus · Accepted Answer

The natural-rate hypothesis predicts that in the long run, the economy will operate at its natural rate of output, which is determined by structural factors such as the quantity and quality of labor and capital. Inflation may fluctuate in the short run, but in the long run, it will be consistent with the expected rate of inflation. Therefore, choices A, B, and D are not correct as they do not represent the long-run prediction of the natural-rate hypothesis.

According to the Natural-Rate Hypothesis, Output Will Be at the Natural