Question

Typically speaking. If the unemployment rate is lower than the natural rate of unemployment we would...

Typically speaking. If the unemployment rate is lower than the natural rate of unemployment we would expect to witness:

A. Falling wages and negative inflationary pressure.

B. Rising wages and negative inflationary pressure.

C. Rising wages and positive inflationary pressure.

D. Falling wages and positive inflationary pressure.

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Answer #1

Natural rate of unemployment is the unemployment rate when economy is producing full output potential. This is greater than zero due to frictional and structural unemployment.

If the unemployment rate is lower than this rate than the economy is overheating and positive inflation pressure is expected. Also, when unemployment rate is low then the demand of labor is more than the supply of labor so labor will demand higher wages. Therefore, wages will rise in this scenario.

So the answer is option c) i.e. rising wages and positive inflationary pressure.

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