Question

If the current unemployment rate is 3.9%, would one expect the rate of inflation to increase or decrease? Explain your answer.

Answer 1

The current level of unemployment rate is below the normal rate of unemployment rate which is at 5%. The economy is at a boom and overheating, that is why we have a lower unemployment level. In the coming time, the output will be correcting itself i.e. it will fall back to the natural level and the inflation will decease.

Demand will decrease, the Fed may increases the rate or government will increases to taxes to cool the economy and that will decrease the inflation and increase the unemployment level.