Question

in an inflationary gap, theselect one:a. unemployment rate is above the nairu.b. unemployment rate is below the nairu.c. nairu is negative.d. frictional unemployment rate is zero.e. cyclical unemployment rate is positive.

Answer 1

In an inflationary gap, the unemployment rate is below the NAIRU, indicating that unemployment is lower than what is sustainable without accelerating inflation.

Step-by-step explanation:

In an inflationary gap, the characteristic feature is that the economy's output is temporarily above its long-term sustainable level, which tends to push unemployment below what is sustainable in the long run. The correct answer to the student's question is that in an inflationary gap, the unemployment rate is below the NAIRU (Non-Accelerating Inflation Rate of Unemployment). The NAIRU represents a level of unemployment at which inflation does not accelerate, often considered the natural rate of unemployment. In an inflationary gap, because the economy is performing above potential, unemployment drops as more workers are demanded. However, this scenario tends to create upward pressure on wages and prices, leading to inflation.

The NAIRU is not negative nor is frictional unemployment ever zero because there will always be workers in between jobs or newly entering the workforce. The cyclical unemployment rate is not positive in an inflationary gap because cyclical unemployment correlates with economic downturns, not periods of robust economic activity.