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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 the fourth pillar of wages and price stability
NDERITU Reply
enlighten me please
Bongani
Do we have calculation in macroeconomics
Wilberforce Reply
What will be the multiplier, when MPS is 0, 0.4, 0.6, and 1? What will it be when the MPC is 1, 0.90, 0.67, 0.50, and 0? How much of a change in GDP will result if firms increase their level of investment by $8 billion and the MPC is 0.80? And If the MPC is 0.67?
Ayesha Reply
what are the side effects of government policies
narayan Reply
Government policy can influence interest rates, a rise in which increases the cost of borrowing in the business community. Higher rates also lead to decreased consumer spending. Lower interest rates attract investment as businesses increase production.
REHMA
if there is a negative technology shock to the economy in short run the firms production cost will go up and labor goes down and thus consumption and production will be lower than before. the government can spend to create jobs and central Bank can lower the interest rates
Dine
what are marlet prices
Jaheim Reply
price which includes net indirect taxes
Anish
what is aggregate demand
Kalkidan Reply
what is micro economics
A-dip Reply
microscopic study...
REHMA
microeconomics is study of individual, household and firms of division making and allocation of resources.
himanshi
absolutely
Shahzaib
😄😂😅
Thi
Join me in Vietnam
Thi
cũygi👅
Thi
what a pure economics. must have downloaded by mistake.
Zaiveisho
microeconomics is the study of an individual unit in an economic system or an household
DAMIAN
what really cause inflation?
Urey Reply
what is trade deficit
vivek Reply
is ther forgon alternative. is the amount sacrifice of one thing to gain another thing
Alie
what is enflation rate?
Mohibullah Reply
Is it inflation rate sir
Bilal
yes
Mohibullah
This is the annual rate of increase of basic household goods and services and measures also the cost of living and doing business in a country. it's a important information when making for forecast or business plans.
this is continuous increase of overall price level
Bethwel
the betewen microeconomics and macroeconomics is microeconomics is concerned with individual scarcity like household,workers and so on while macroeconomics is focuced on the problème winth organisation the collaboration with others companies the profits and then the growth of the organisation
Amadou Reply
what is unemployment?
kwizera
what is tax base
ekwuye Reply
The tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority.
Mare
difference between voluntary and involuntary unemployment?
kwizera
what is economic system
Alinda Reply
Quantity of Gasoline in millions was?
Touseef Reply
1000cubic meter
Keyrene
definition of phillips curve
Alok Reply

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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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