In the long run, unemployment returns to the natural rate; which statement is true about inflation expectations?

• A. Unemployment can deviate from natural rate due to money growth
• B. Unemployment returns to the natural rate irrespective of inflation
• C. Inflation determines unemployment in the long run
• D. Unemployment is unpredictable in the long run

Answer: (B)

In the long run, unemployment is determined by structural factors and settles at the natural rate, while inflation is driven by the rate of money growth and adjusts through expectations. Because people update their expectations when inflation changes, the short-run effect of higher money growth on unemployment fades, and the unemployment rate returns to the natural rate regardless of how high inflation is. This reflects the long-run neutrality of money for real variables: inflation can rise, but it doesn’t keep unemployment away from its natural level. So the statement that unemployment returns to the natural rate irrespective of inflation best captures this idea. The other options imply a permanent or causal link between inflation and unemployment in the long run, which the long-run perspective does not support.