The natural rate hypothesis implies that policy can affect unemployment only in the short run, not in the long run. Which option expresses this idea?

• A. It suggests policy can affect unemployment only in the short run, not in the long run.
• B. It suggests policy can permanently reduce unemployment below the natural rate.
• C. It suggests there is no effect on unemployment.
• D. It suggests policy can permanently raise inflation.

Answer: (A)

The main idea being tested is that, under the natural rate hypothesis, unemployment can be influenced by policy in the short run but not in the long run. In the short run, a policy that stimulates aggregate demand can push unemployment down away from the natural rate, but as wages and prices adjust over time, unemployment drifts back to the natural rate. In the long run, the natural rate of unemployment is determined by structural factors, not by policy, so persistent changes in unemployment aren’t achievable through demand-side measures. The correct statement captures this: policy can affect unemployment only in the short run, not in the long run.

The other possibilities fit different ideas or focus on other outcomes. Permanently reducing unemployment below the natural rate would contradict the concept that unemployment gravitates to the natural rate in the long run. Saying there is no effect on unemployment ignores the temporary impact policy can have. Permanently raising inflation shifts the discussion to price outcomes, not the long-run unemployment path described by the natural rate hypothesis.