Question

Consider panel (b) of Figure $17-4$, and suppose that the economy initially operates at point $A$, at which the inflation rate is $0$percent and the unemployment rate is $6$percent, which is the natural rate of unemployment. Then the inflation rate decreases to $-1$ percent. Does additional cyclical, frictional, or structural unemployment account for the resulting rise in the unemployment rate at point $C$? Explain briefly.

Short answer

Low (or negative) inflation rates tend to be amid high unemployment rates (as at $C$).

Step-by-step solution

Given Information

The economy initially operates at point $A$, at which the inflation rate is $0$percent and the unemployment rate is $6$percent, which is the natural rate of unemployment.

Explanation

• If we glance at both increases and reduces in aggregate demand, we see that prime inflation rates tend to be related to low unemployment rates (as at $B$)
• Which low (or negative) inflation rates tend to be amid high unemployment rates (as at$C$).