In the aggregate supply-aggregate demand model, if every person in the economy correctly anticipates the inflation rate, the unemployment rate will
A)be less than the natural rate of unemployment.
B)be more than the natural rate of unemployment.
C)equal the natural rate of unemployment.
D)equal zero.

Question

Quizplus · Accepted Answer

When everyone correctly anticipates the inflation rate, this means that all prices and wages adjust accordingly. As a result, the aggregate supply curve shifts appropriately to reflect the changes in costs and the general price level. This ensures that the economy operates at its potential output level and the labor market clears at the natural rate of unemployment, where the only remaining unemployment is frictional or structural. Therefore, the unemployment rate equals the natural rate of unemployment.

In the Aggregate Supply-Aggregate Demand Model, If Every Person in the Economy