-Refer to the above figure. Suppose the economy is at C. If the government tried to reduce the unemployment rate to 3 percent, the new long-run outcome will be at point

Question

Quizplus · Accepted Answer

Attempting to reduce the unemployment rate below its natural rate (which is assumed to be at point C) by increasing aggregate demand would eventually lead to higher inflation without reducing unemployment in the long run. This would move the economy to a point like H, where the unemployment rate returns to its natural rate, but at a higher price level.

-Refer to the Above Figure