Question : The natural rate of unemployment refers to the unemployment rate:
Option 1: During a recessionary period
Option 2: During an inflationary period
Option 3: At which there is no cyclical unemployment
Option 4: At which there is maximum employment
Correct Answer: At which there is no cyclical unemployment
Solution : The correct answer is (c) At which there is no cyclical unemployment.
The natural rate of unemployment is also known as the non-accelerating inflation rate of unemployment (NAIRU). It represents the level of unemployment that exists in an economy when it is operating at its potential output or full employment level. At this rate, there is no cyclical unemployment, which refers to the unemployment caused by fluctuations in economic activity or business cycles.
The natural rate of unemployment includes structural and frictional unemployment, which are considered as part of the normal functioning of the labor market. Structural unemployment arises from changes in the structure of the economy, such as technological advancements or shifts in industries, which require workers to acquire new skills or find employment in different sectors. Frictional unemployment, on the other hand, occurs when individuals are transitioning between jobs or entering the labor force for the first time.
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