The natural rate hypothesis states that in the long run,
A)economic policy can reduce both inflation and unemployment
B)the economy's natural rate of annual growth is approximately 3%
C)monetary and fiscal policy have their greatest effect on the rate of unemployment
D)the Phillips curve is horizontal
E)the economy tends toward the natural rate of unemployment

Question

Quizplus · Accepted Answer

The natural rate hypothesis states that in the long run, the economy tends toward the natural rate of unemployment, which is the rate of unemployment consistent with full employment and potential output. The natural rate hypothesis suggests that monetary and fiscal policy can only have short-term effects on unemployment and that attempts to lower the unemployment rate below the natural rate through expansionary policies will only result in higher inflation in the long run. Therefore, the natural rate hypothesis implies a vertical Phillips curve in the long run, where inflation is determined solely by monetary factors, rather than by the level of unemployment.

The Natural Rate Hypothesis States That in the Long Run