Final answer:
The full-employment rate with zero cyclical unemployment is known as the natural unemployment rate, which persists due to frictional and structural factors despite different levels of inflation. Option D is correct.
Step-by-step explanation:
The full-employment rate that occurs when cyclical unemployment is zero is known as the natural unemployment rate. This concept recognizes that even in a healthy economy, there is always some level of unemployment due to people transitioning between jobs, or structural changes in the market—this is not considered harmful. The great economist Milton Friedman highlighted that although there's a temporary trade-off between inflation and unemployment, no such permanent relationship exists, meaning the economy can reach different inflation rates with the same natural rate of unemployment.
Fighting unemployment or inflation involves understanding that cyclical unemployment stems from business cycle fluctuations and is absent when the economy produces at potential GDP. In contrast, the natural rate of unemployment reflects the frictional and structural unemployment that persists due to the normal dynamics of labor markets, even when the economy is strong.