Question

6. Problems and Applications Q6 Suppose the Federal Reserve's policy is to maintain low and stable inflation by keeping unemployment at its natural rate. However, the Fed believes that the natural rate of unemployment is 4 percent when the actual natural rate is 5 percent. If the Fed bases its policy decisions on its belief, there will be a

Answer 1

Answer: Rising trend

Explanation:

If the actual natural rate is 5%, it would be higher than the natural rate of 4%. This would prompt the Fed to act in such a way as to reduce unemployment in the economy. To do this, they would embark on an expansionary monetary policy to get the economy growing so that more people can be employed.

When there is more money in the economy though, people will have more to buy goods and services and this increase in demand will cause inflation to rise to reflect that there is more demand than supply.