Suppose we observe several years of falling inflation rates for an economy.Which of the following would best explain this phenomenon?

A) Unemployment is probably at the natural rate.
B) The unemployment rate must be rising.
C) The unemployment rate must be below the natural rate.
D) The unemployment rate is probably above the natural rate.
E) Aggregate output must be increasing.

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Mibergine Francilus · Accepted Answer

Final Answer : D, Explanation :  The Phillips curve illustrates the inverse relationship between unemployment and inflation. Falling inflation rates suggest that there is a decrease in the demand for goods and services leading to a decline in prices. This suggests that there is a lower demand for labor resulting in an increase in unemployment rates. The natural rate of unemployment is the rate that does not lead to inflationary pressure. As unemployment rates rise above the natural rate, inflation rates decrease. Therefore, D is the best choice as falling inflation rates suggest that the unemployment rate is probably above the natural rate.

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