If the unemployment rate is below the natural rate, then we expect to see
A) falling wages, causing the short-run aggregate supply curve to shift up.
B) falling wages, causing the short-run aggregate supply curve to shift down.
C) increasing wages, causing the short-run aggregate supply curve to shift up.
D) increasing wages, causing the short-run aggregate supply curve to shift down.

Question

Quizplus · Accepted Answer

When the unemployment rate is below the natural rate, it means that the labor market is tight with a shortage of workers. This leads to increasing wages as firms compete with each other to lure employees. Increased wages lead to higher production costs for firms, causing the short-run aggregate supply curve to shift up.

If the Unemployment Rate Is Below the Natural Rate, Then