Chapter 15 - Assignment 1: The Economic Report of the President
In Section 1 of Chapter 15, your text explores the possibility of a tradeoff between inflation
and unemployment. A key element of the discussion is the "natural rate of unemployment," the
unemployment rate that exists in the absence of any cyclical unemployment. An alternative
concept relating inflation and unemployment rate is the NAIRU, the "nonaccelerating-inflation
rate of unemployment." To help understand the NAIRU, read the passage from Chapter 2 of
the Economic Report of the President, 1998 entitled: "Recent
Inflation Performance and the NAIRU."
- Define the NAIRU.
- Is the NAIRU constant over time? Why or why not?
- How could "special transitory factors" make short-run changes in inflation and the
unemployment rate seem inconsistent with the NAIRU expected to exist? In other words, how can
we experience low inflation today, yet have a current unemployment rate that is too
low to be consistent with low inflation in the future?
- At the time this passage was written, what did the Clinton Administration believe to be a
reasonable value for the NAIRU?
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