Question : The concept of the natural rate hypothesis suggests that:
Option 1: Unemployment will eventually return to its natural rate
Option 2: Unemployment can be permanently reduced through government intervention
Option 3: Inflation can be permanently reduced through government intervention
Option 4: Inflation and unemployment are unrelated
Correct Answer:
Unemployment will eventually return to its natural rate
Solution : The correct answer is (a) Unemployment will eventually return to its natural rate.
The natural rate hypothesis, also known as the natural rate of unemployment theory, posits that there is a natural or equilibrium rate of unemployment in the economy. This natural rate is determined by structural factors such as labor market frictions, skills mismatch, and institutional factors.
According to the natural rate hypothesis, in the long run, attempts to reduce unemployment through expansionary monetary or fiscal policies will only result in temporary decreases in unemployment. Eventually, the economy will adjust, and the unemployment rate will return to its natural rate.
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