Suppose That Members of Congress and the President Believe That

Multiple Choice

Suppose that members of Congress and the President believe that the natural rate of unemployment is 2% but in fact it is 6%,and employing fiscal policy they increase AD each time unemployment rises above 2%.The underestimation of the natural rate combined with adaptive expectations will

A) lead to continuous inflation by shifts in both AD and SAS.
B) lead to a continuous inflation by a shift in only AD.
C) lead to a continuous inflation by a shift in only SAS.
D) lead to continuous increases in output and unemployment.