Question

From 1994 to 1999, inflation in the United States was relatively constant at approximately 2.5 percent. When inflation is constant for an extended period, which of the following is most likely?

a. The actual inflation rate will be greater than the anticipated rate, leading to an actual rate of unemployment that exceeds the natural rate of unemployment.
b. People will correctly anticipate the actual inflation rate, and the actual rate of unemployment will exceed the natural rate of unemployment.
c. People will correctly anticipate the actual inflation rate, and the actual rate of unemployment will approach the natural rate of unemployment.
d. Actual inflation will be less than the anticipated rate, leading to an actual rate of unemployment that exceeds the natural rate of unemployment.

Answer 1

The correct answer is option C

When inflation is constant for an extended period of time,

C. People will correctly anticipate the actual inflation rate, and the actual rate of unemployment will approach the natural rate of unemployment.