Chapter 35, Problem 3MCQ

To determine

The correct option for natural rate hypothesis

Answer to Problem 3MCQ

From the available options, the correct option is high enough that the actual rate of inflation equals the expected rate.

Explanation of Solution

The natural rate hypothesis conclude that the unemployment rate must be regulated so that expected inflation and actual inflation are equal in order to prevent inflation. According to this theory, inflation rate would not remain steady until the unemployment rate reaches its natural or normal level which means in order to match the actual rate of inflation to the expected rate, the unemployment rate must be high enough. Therefore, it would not be 5%, close to 0, and below the nonaccelerated inflation rate and unemployment, as it causes the wage rate. And, this rate would not be left the unemployment rate after stabilizing or setting the economy.

Therefore, the correct option is b (high enough that the actual rate of inflation equals the expected rate)

Economics Concept Introduction

Introduction: The theory of natural rates contained two supporting hypotheses from which first specifies that monetary policy has no bearing on the natural rate of unemployment. Furthermore, there is no long-term trade-off between inflation and the departure of unemployment from the natural rate.