Open-market purchases by the Fed

Last year, the unemployment rate was 4 percent and the inflation rate was 3 percent. If the natural rate of unemployment is 3 percent, how do you expect inflation to change?

What will be an ideal response?

Which of the following statements best describes the rational expectations hypothesis?

A) Individuals will not enter into long-term agreements unless they are certain about the payments they will receive. B) It is likely that individuals will consistently make errors. C) Individuals will make random errors, independent of previous errors. D) It is reasonable to expect individuals to consistently underestimate the level of inflation.