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The unemployment rate on the long-run Phillips curve will be the natural rate of unemployment. A small inflationary increase in the price level from AD 0 to AD 1 will have the same natural rate of unemployment as a larger inflationary increase in the price level from AD 0 to AD 2 . The macroeconomic equilibrium along the vertical aggregate supply curve can occur at a variety of different price levels, and the natural rate of unemployment can be consistent with all different rates of inflation. The great economist Milton Friedman (1912–2006) summed up the neoclassical view of the long-term Phillips curve tradeoff in a 1967 speech: “[T]here is always a temporary trade-off between inflation and unemployment; there is no permanent trade-off.”

In the Keynesian perspective, the primary focus is on getting the level of aggregate demand right in relationship to an upward-sloping aggregate supply curve. That is, AD should be adjusted so that the economy produces at its potential GDP, not so low that cyclical unemployment results and not so high that inflation results. In the neoclassical perspective, aggregate supply will determine output at potential GDP, unemployment is determined by the natural rate of unemployment churned out by the forces of supply and demand in the labor market, and shifts in aggregate demand are the primary determinant of changes in the price level.

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Fighting unemployment or inflation?

As explained in Unemployment , unemployment can be divided into two categories: cyclical unemployment    and the natural rate of unemployment    , which is the sum of frictional and structural unemployment. Cyclical unemployment results from fluctuations in the business cycle and is created when the economy is producing below potential GDP—giving potential employers less incentive to hire. When the economy is producing at potential GDP, cyclical unemployment will be zero. Because of the dynamics of the labor market, in which people are always entering or exiting the labor force, the unemployment rate never falls to 0%, not even when the economy is producing at or even slightly above potential GDP. Probably the best we can hope for is for the number of job vacancies to equal the number of job seekers. We know that it takes time for job seekers and employers to find each other, and this time is the cause of frictional unemployment. Most economists do not consider frictional unemployment to be a “bad” thing. After all, there will always be workers who are unemployed while looking for a job that is a better match for their skills. There will always be employers that have an open position, while looking for a worker that is a better match for the job. Ideally, these matches happen quickly, but even when the economy is very strong there will be some natural unemployment and this is what is measured by the natural rate of unemployment.

The neoclassical view of unemployment tends to focus attention away from the problem of cyclical unemployment—that is, unemployment caused by recession—while putting more attention on the issue of the rates of unemployment that prevail even when the economy is operating at potential GDP. To put it another way, the neoclassical view of unemployment tends to focus on how public policy can be adjusted to reduce the natural rate of unemployment. Such policy changes might involve redesigning unemployment and welfare programs so that they support those in need, but also offer greater encouragement for job-hunting. It might involve redesigning business rules with an eye to whether they are unintentionally discouraging businesses from taking on new employees. It might involve building institutions to improve the flow of information about jobs and the mobility of workers, to help bring workers and employers together more quickly. For those workers who find that their skills are permanently no longer in demand (for example, the structurally unemployed), policy can be designed to provide opportunities for retraining so that these workers can reenter the labor force and seek employment.

Questions & Answers

discuss advantages and disadvantages of international trade.
Ram Reply
how can I ask the question here . tell me anyone plz I'm new user so kindly help here I will click ......?..🤗
ISRAR
me . I'm *
ISRAR
So kindly help me. where I will click......***
ISRAR
What are the reasons of demand pull inflation
GIRIDHARI Reply
the reasons behind pull inflation are high rate of interest
Ahmed
yes
M-H-S
in other hand when demand of specific commodity is high and its supply is low there will be inflation of price
Ahmed
Thank you
GIRIDHARI
you are welcome
Ahmed
thank you
Mohamed
what is barter system
twinkel Reply
a system in which goods are exchanged for other goods
daniel
Barter system is said to be the process whereby goods are being exchange for goods
Asamoah
a system in which money have not play any role
Ramu
goods and services are exchanged .. problem is finding equitable or agreeable value for the exchange of the goods or services.. I teach maths privately and love home made cake, I decided 4 home made cakes was worth an hour of private maths 😁
jax
ok.thank u
twinkel
thanks a lot to everyone .
ISRAR
accounts in balance of trade
Kamuyu Reply
What is fiscal policy and intrest rates
Attah Reply
fiscal policy is the use of govt. revenue collection and expenditure to influence the economy.
twinkel
income and expenditure
Bittu Reply
Macro economics : it is the study of all aggregate of all economic activities of an economic as whole.
Rajat Reply
what is macro economics
Sarah Reply
it is study of all aggregate of all economic activities of an economic as whole.
Rajat
Macro economics is the aggregate study of national income, investment, price level, changes in economic activities, GDP and economic inflation.
Zahid
hey
Ahmed
how are you
Ahmed
thanks
Ahmed
i am find
Ahmed
what about you
Ahmed
am good bro
Ahmed
am fine
Ahmed
what is comparative and superlative advantage? give an example
Xanaan Reply
Methods used to correct trade deficits?
David Reply
what is role capitalism unemployment?
Mafsuud Reply
being unemployment look job but not achieved their being out labor force is person can't work
Mafsuud
being unemployment look job but not achieved their being out labor force is person can't work
Mafsuud
themes studied in economics include?
Patrick Reply
Financial accounting GDP and GNP
Samson Reply
can u explain
Sarah
this means that the demand curve have negative relationship with the price ..which means that when high price low demand of the product and vice versa so higher price will shirnk the demand of product
Ahsan Reply
Higher price level ∴Real value of household wealth increase ∴Net export decrease ∴More money needed, interest rate increase, investment decrease
sirius
net export decrease
Cyril
a person has 60birr to buy two commodities,x and y the price of x is four birr unit the price of y is two birr unit his utility functio given by u=xy+2x determine the budget equation
Mohammed Reply
the budget equation will be- 60 birr= 4x+2y
Ramu

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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