Suppose the government misjudges the natural rate of unemployment to be much lower than it actually is, and thus undertakes expansionary fiscal and monetary policies to try to achieve the lower rate. These policies might at first succeed because

1. in the long run, as aggregate demand increases, unemployment is reduced.

2. in the short run, as aggregate demand increases, unemployment is reduced.

3. in the short run, this action will decrease aggregate demand and unemployment.

4. in the long run, as aggregate demand decreases, unemployment is reduced

2. in the short run, as aggregate demand increases, unemployment is reduced.

Explanation:

The government misjudging the natural rate of unemployment to be much lower than it actually is, and thus undertaking expansionary fiscal and monetary policies to try to achieve the lower rate. These policies might at first succeed because in the short run, as aggregate demand increases, unemployment is reduced due to the expansionary policies.

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