Question

Recently the U.S. government sent tax rebate checks and the Fed increased the money supply. If decision makers underestimate the inflationary impact of these policies,

unemployment falls below natural rate, unemployment rises above natural rate, there is no effect on unemployment

or unemployment falls if the change in monetary policy dominates but increases if change in fical policy dominates

okay so the answer is unemployment rate falls below the natural rate- but these questions in general that are based on how expectations impact the unemploment rate confue me. How am i supposed to go about one of these questions??? Please help

Answer 1

The current status of the economy indicates that the economy is near its full employment level so that there is a very little recessionary Gap. If there is both fiscal expansion and monetary expansion, aggregate demand will increase by more than what is required to close the gap. Ultimately there will be an inflationary gap. To cater the increased demand, firms will hire more workers or force overtime which will reduce the rate of unemployment below the natural rate.