Chapter 34, Problem 6MCQ

To determine

The correct option for a nonaccelerating inflation rate of unemployment, or NAIRU.

Answer to Problem 6MCQ

From the available options, the correct option is all of the above.

Explanation of Solution

The NAIRU is the lowest level of unemployment that can be maintained without raising inflation and wage growth. It enables us to estimate the amount of "spare capacity" in the economy but is impossible to directly see the NAIRU. It is the unemployment rate that occurs when there is no push for the inflation rate to rise which means it is the rate of unemployment where inflation will not change and it would be similar to the natural rate of unemployment because they both affect the level of unemployment when the economy is very near to achieve the full employment. In the long run, the unemployment rate will climb until it reaches the NAIRU, and any attempt to reduce it will result in higher inflation which means it is associated with the long-run Philips curve. And, also, there is no long-run trade-off between inflation and unemployment in NAIRU because the unemployment rate reaches the natural level of unemployment or non-accelerating inflation rate of unemployment.

Therefore, the correct option is e (all of the above).

Economics Concept Introduction

Introduction: Inflation means there is an increase in the price of goods and services in the economy which affects the consumption level of the people in the country. And unemployment is the rate of unemployed people who do not have any work or source to employ in the economy.