Macroeconomics

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Moderate

The Natural Rate in an Inflationary Gap

MACRO-6M1ZRG

Suppose aggregate demand (AD) and aggregate supply (AS) in the economy of Dorne intersect at a level of GDP that exceeds potential GDP.

Which one of the following choices is correct in regard to the actual unemployment rate in Dorne?

A

It will exceed the natural rate because employers will increase wages and attract new workers into the labor market.

B

It will exceed the natural rate since higher wages will result in many workers leaving the labor market.

C

It will be lower than the natural rate since because frictional unemployment is reduced significantly in inflationary periods.

D

It will be lower than the natural rate because employers will increase wages and attract new workers into the labor market.