Question

If the natural rate of unemployment is 5%, and the actual rate of unemployment is 4%: a the short-run Phillips curve will shift down. b disinflation is likely to occur. c there will be no effect on prices. d inflation will increase. e deflation is likely to occur.

Answer 1

Answer: d. inflation will increase.

Explanation:

The Natural rate of unemployment is the long term rate of unemployment which means that it is the rate associated with the Potential GDP.

If the Actual unemployment is less than this natural rate, it means that the Economy is performing better than the potential GDP. When this is happening, it means that the economy is overheating.

One of the symptoms of an overheated economy is increased inflation as more people can afford to buy goods and services. Inflation is therefore more probably rising in this economy.