According to the natural-rate hypothesis, the levels of output and unemployment depend on:
A) aggregate demand in the short run, but not in the long run.
B) aggregate demand in the long run, but not in the short run.
C) the natural rate of unemployment in the short run, but the natural rate of inflation in the long run.
D) the natural rate of inflation in the short run, but the natural rate of unemployment in the long run.

Question

Quizplus · Accepted Answer

The natural-rate hypothesis posits that in the short run, output and unemployment levels can be influenced by aggregate demand due to price and wage stickiness. However, in the long run, the economy tends to return to levels of output and unemployment that are determined by supply-side factors, such as technology and labor market institutions, rather than by aggregate demand. This is because prices and wages adjust over time to reflect changes in demand, bringing the economy back to its natural rates of output and unemployment.

According to the Natural-Rate Hypothesis, the Levels of Output and Unemployment