Question : The natural rate of unemployment refers to the:
Option 1: Rate of unemployment that prevails when the economy is at full employment
Option 2: Rate of unemployment that prevails during a recession
Option 3: Rate of unemployment that prevails during inflation
Option 4: Rate of unemployment that prevails during deflation
Correct Answer:
Rate of unemployment that prevails when the economy is at full employment
Solution : The correct answer is (a) The rate of unemployment that prevails when the economy is at full employment
The natural rate of unemployment, also known as the non-accelerating inflation rate of unemployment (NAIRU), represents the level of unemployment that exists when the labor market is in equilibrium and the economy is operating at its potential output. It is the rate of unemployment consistent with stable inflation and occurs when there is no cyclical unemployment or deviation from full employment.
The natural rate of unemployment includes structural and frictional unemployment, which are considered to be unavoidable in a dynamic economy. It excludes cyclical unemployment, which is the unemployment caused by fluctuations in the business cycle.
