Final answer:
In the long run, the natural rate of unemployment is determined by market forces and is represented by the long-run aggregate supply (AS) curve. The short-run AS curve may deviate from the long-run AS curve, allowing for unemployment to be slightly below the natural rate for a time at a cost of higher inflation. However, over time, low unemployment rates will lead to higher wages, shifting the short-run AS curve back to the left and returning the economy to the natural rate of unemployment.
Step-by-step explanation:
In the short run, it is possible to have unemployment slightly below the natural rate for a time, at a price of higher inflation, as shown by the movement from Eo to E₁ along the short-run AS curve. However, over time the extremely low unemployment rates will tend to cause wages to be bid up, and shift the short-run AS curve back to the left. The result would be a higher price level, but an economy still at potential GDP and the natural rate of unemployment, as determined by the long-run AS curve.
If the government continues this policy, it will continually be pushing the price level higher and higher, but it will not be able to achieve its goal of zero percent unemployment, because that goal is inconsistent with market forces.
Rational expectations can be thought of as a version of neoclassical economics because it argues that potential GDP and the rate of unemployment are shaped by market forces as wages and prices adjust. However, it is an 'extreme' version because it argues that this adjustment takes place very quickly. Other theories, like adaptive expectations, suggest that adjustment to the neoclassical outcome takes a few years.