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In the diagram, the long-run Phillips curve is the vertical red line. The NAIRU theory says that when unemployment is at the rate defined by this line, inflation will be stable. However, in the short-run policymakers will face an inflation-unemployment rate trade-off marked by the "Initial Short-Run Phillips Curve" in the graph.
This exhibits a Phillips curve relationship, as inflation is positively related with output (i.e. inflation is negatively related with unemployment). However, and this is the point, the existence of a short-run Phillips curve does not make the central bank capable of exploiting this relationship in a systematic way.
Demand-pull inflation occurs when aggregate demand in an economy is more than aggregate supply. It involves inflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve. This is commonly described as "too much money chasing too few goods". [1]
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Milton Friedman argued that a natural rate of inflation followed from the Phillips curve.This showed wages tend to rise when unemployment is low. Friedman argued that inflation was the same as wage rises, and built his argument upon a widely believed idea, that a stable negative relation between inflation and unemployment existed. [11]
The current unemployment rate of 4.1 percent is still below the Fed’s estimates of the “natural” rate of unemployment (4.2 percent) — a level that allows for everyone who wants a job to ...
U.S. consumer sentiment fell sharply in May to the lowest level in six months as Americans cited stubbornly high inflation and interest rates, as well as fears that unemployment could rise. The ...
The calculation for the output gap is (Y–Y*)/Y* where Y is actual output and Y* is potential output. If this calculation yields a positive number it is called an inflationary gap and indicates the growth of aggregate demand is outpacing the growth of aggregate supply—possibly creating inflation; if the calculation yields a negative number it is called a recessionary gap—possibly ...