Question 67

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

NAIRU represents the level of unemployment at which inflation does not accelerate. This concept aligns with the long-run Phillips curve, which suggests that there is no trade-off between inflation and unemployment in the long term.

A) Phillips curve in the short run

The short-run Phillips curve indicates a trade-off between inflation and unemployment, suggesting that lower unemployment can lead to higher inflation. However, this does not accurately describe NAIRU since NAIRU pertains to the long-term equilibrium where inflation is stable.

B) Phillips curve in the long run

This option correctly describes NAIRU, as the long-run Phillips curve shows that once the economy reaches the NAIRU, inflation remains stable regardless of unemployment fluctuations. NAIRU reflects a sustainable unemployment rate where inflation does not accelerate.

C) Cyclical unemployment in the long run

Cyclical unemployment refers to unemployment that occurs due to economic downturns, which is not relevant to the NAIRU concept. NAIRU focuses on the natural level of unemployment, excluding cyclical factors that can vary over time.

D) Cyclical unemployment in the short run

Similar to option C, cyclical unemployment in the short run is related to temporary economic conditions and does not pertain to NAIRU. NAIRU is concerned with long-term unemployment levels that do not affect inflation rates.

Conclusion

The definition of NAIRU is best illustrated by the Phillips curve in the long run, as it encapsulates the point at which inflation remains stable despite the level of unemployment. Other options fail to accurately represent the relationship between unemployment and inflation as it pertains to NAIRU, focusing instead on short-term fluctuations and cyclical factors.