A country's central bank implements a sustained expansionary policy with the stated goal of keeping the unemployment rate permanently below its long-run natural rate. Based on the economic theory concerning inflation expectations, what is the most likely long-term consequence of this policy?

Analyzing Economic Policy Outcomes

Evaluating a Policy Claim on Unemployment and Inflation

According to the economic theory that incorporates inflation expectations, a government can achieve a permanently lower unemployment rate by consistently accepting a higher, but stable, rate of inflation.

The Role of Expectations in the Inflation-Unemployment Trade-off

Match each concept related to the inflation-unemployment trade-off with its correct description.

While a trade-off between inflation and unemployment may exist in the short run, economic theory suggests it is not a permanent relationship because in the long run, ___________ adjust, causing the economy to return to its natural rate of unemployment.

Analyzing a Central Bank's Policy Goal

An economic advisor makes the following claim to a government leader: 'We can achieve a permanent reduction in our unemployment rate if we are willing to tolerate a consistently higher, but stable, rate of inflation.' Which of the following statements provides the most accurate evaluation of this claim based on the role of expectations in the economy?