Question

Is natural rate related to business cycles or not? Explain.

Is natural rate related to business cycles or not? Explain.

Homework Answers

Answer #1

Natural rate refers to the rate of unemployment that occurs when labor market is in equilibrium. It is the sum of frictional and structural unemployment rate. Every economy has a natural rate of unemployment because workers are continuously looking for better jobs and coming and going from the labor market.

It is not related to business cycles as this rate remains constant and does not increase during recession and decrease during boom. Only cyclical unemployment in the economy is related to business cycles. Thus, natural rate of unemployment is not determined by business cycles.

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