The Natural-Rate Hypothesis u The view that unemployment eventually returns to its natural rate, regardless of the rate of inflation, is called the natural-rate hypothesis. u Historical observations support the natural-rate hypothesis.
The Cost of Reducing Inflation u To reduce inflation, an economy must endure a period of high unemployment and low output. u When the Fed combats inflation, the economy moves down the short-run Phillips curve. u The economy experiences lower inflation but at the cost of higher unemployment.