Natural rate of unemployment is the rate of unemployment, at which :

Question

Accepted Answer

The correct option is 1:

The Natural Rate of Unemployment (NRU) is a foundational concept in macroeconomics, often defined as the lowest rate of unemployment an economy can sustain without causing accelerating inflation. It represents the unemployment level when the economy is in long-run equilibrium, meaning all cyclical unemployment (unemployment due to economic downturns) has been eliminated. At this rate, the number of job seekers roughly equals the number of job openings, and the labor market is balanced. Since the NRU reflects structural and frictional unemployment—which exist even in a healthy economy—it is also known by the acronym NAIRU (Non-Accelerating Inflation Rate of Unemployment). Thus, when unemployment is at its natural rate, inflationary pressures caused by a tight labor market are absent, leading to a stable rate of inflation.

The incorrect option is 2:
Rate of inflation is unstable. If the rate of inflation is unstable, it implies the economy is not at its long-run equilibrium (NRU). Accelerating or decelerating inflation indicates that actual unemployment is deviating significantly from the NRU.

The incorrect option is 3:
Rate of inflation is falling. A falling rate of inflation (disinflation) typically occurs when the actual rate of unemployment is *above* the NRU. This suggests the economy is operating below its full potential, leading to slack in the labor market and reduced wage pressures.

The incorrect option is 4:
Rate of inflation is rising. A rising or accelerating rate of inflation occurs when the actual rate of unemployment is *below* the NRU. This "overheating" of the labor market leads to tight conditions, forcing employers to raise wages, which subsequently pushes up prices and causes inflation to accelerate.