Quiz 10: Output,inflation,and Unemployment: Alternative Views


According to the theory of the natural rate of unemployment,the policymaker cannot peg the unemployment rate at some arbitrarily determined target rate.Any attempt to lower the unemployment rate below the natural rate by raising the rate of growth in aggregate demand can only be achieved in the short run but will lead to accelerating inflation in the long run.The unemployment rate will slowly return to the natural rate and the lasting effect of an expansionary policy will be a higher rate of inflation.

The natural rate of unemployment is that rate of unemployment that is consistent with the long-run equilibrium level of employment.It changes with the productive capacity of the economy and is not necessarily constant over time.According to the monetarists,monetary policy can influence the actual level of unemployment,but it cannot influence the natural rate.

An increase in productivity will shift the aggregate supply curve to the right as well as shift both the short-run and long-run Phillips curve upward,resulting in higher inflation and lower unemployment.This runs counter to the traditional Phillips curve relationship between inflation and unemployment.