In macroeconomics, what is meant by the natural rate of unemployment?

• A. The unemployment rate that results when the government sets the minimum wage equal to the median wage.
• B. The unemployment rate observed during a recession when cyclical unemployment is at its highest.
• C. The unemployment rate when the labor force participation rate equals 100%.
• D. The unemployment rate that exists when the economy is at potential output, consisting mainly of frictional and structural unemployment (not cyclical).

Answer: (D)

Verified step by step guidance

1. Understand that the natural rate of unemployment refers to the level of unemployment consistent with the economy operating at its potential output, where there is no cyclical unemployment.
2. Recognize that this natural rate includes frictional unemployment, which arises from normal labor market turnover as workers search for jobs, and structural unemployment, which results from mismatches between workers' skills and job requirements.
3. Note that the natural rate excludes cyclical unemployment, which fluctuates with the business cycle and increases during recessions.
4. Recall that the natural rate is not determined by government policies like setting minimum wages, nor does it imply full labor force participation (100%).
5. Summarize that the natural rate of unemployment is the baseline unemployment level reflecting the normal functioning of the labor market when the economy is neither overheating nor in recession.