ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Detailed Solution. The correct answer is The rate of inflation would increase. When the actual unemployment rate is less than the natural rate, inflation increases. When the actual unemployment rate exceeds its natural rate, inflation decreases.

Detailed explanation-2: -The disparity between actual and potential gross domestic product is the output gap. When a negative output gap indicates real GDP is below potential GDP, a sluggish economy. It suggests that there may not be full employment in the economy and the existence of weak demand for goods and services.

Detailed explanation-3: -When the unemployment rate falls below the natural rate of unemployment, referred to as a negative unemployment gap, the inflation rate is expected to accelerate. When the unemployment rate exceeds the natural rate of unemployment, referred to as a positive unemployment gap, inflation is expected to decelerate.

Detailed explanation-4: -The natural rate of unemployment is related to two other important concepts: full employment and potential real GDP. The economy is considered to be at full employment when the actual unemployment rate is equal to the natural rate. When the economy is at full employment, real GDP is equal to potential real GDP.

Detailed explanation-5: -Negative cyclical unemployment is when the actual unemployment rate is less than that of the natural unemployment rate. This condition brings the economy to a phase where the real GDP is more than the potential one. This leads to an inflationary gap and an economy where wages are most probable to fall.