The natural rate hypothesis states that when the inflation rate
A) increases, the unemployment rate will decrease permanently.
B) decreases, the inflation rate will decrease permanently.
C) changes, the unemployment rate changes temporarily and eventually returns to the natural unemployment rate.
D) changes, the change is only temporarily and eventually the inflation rate returns to the natural inflation rate.
E) increases, the natural unemployment rate increases.

Question

Quizplus · Accepted Answer

The natural rate hypothesis suggests that there is a long-run equilibrium unemployment rate in the economy, where the economy is producing at its potential output level. Any change in the inflation rate will bring about a change in unemployment only temporarily, and eventually, the economy returns to the natural (or equilibrium) unemployment rate. Therefore, option C is the best choice.

The Natural Rate Hypothesis States That When the Inflation Rate