Question 39

The non-accelerating inflation rate of unemployment (NAIRU) is illustrated by the Phillips curve in the long run.

NAIRU represents the unemployment rate at which inflation does not accelerate, aligning with the long-run Phillips curve where there is no trade-off between inflation and unemployment.

A) Cyclical unemployment in the short run

Cyclical unemployment refers to unemployment that arises from economic downturns and is temporary. This does not accurately reflect the NAIRU, which is concerned with a stable unemployment rate that does not lead to accelerating inflation, rather than fluctuations caused by economic cycles.

B) Phillips curve in the long run

This option correctly depicts NAIRU, as it correlates to the long-run Phillips curve, which illustrates that in the long term, inflation expectations adjust, leading to a stable unemployment rate that does not influence inflation, thus reflecting the essence of NAIRU.

C) Phillips curve in the short run

The short-run Phillips curve suggests there is a trade-off between inflation and unemployment, which does not align with NAIRU. NAIRU focuses on the long-run relationship where this trade-off does not exist, making this option incorrect.

D) Cyclical unemployment in the long run

Cyclical unemployment is inherently linked to economic fluctuations and is not a stable rate of unemployment. Thus, it does not align with NAIRU, which identifies a specific unemployment rate that maintains stable inflation over time.

Conclusion

The correct answer, the Phillips curve in the long run, effectively captures the essence of NAIRU, as it reflects the unemployment rate that does not lead to inflation acceleration. All other options fail to accurately represent this concept by either focusing on temporary fluctuations or short-term trade-offs that do not pertain to the long-term stability of inflation and unemployment.