NAIRU, which is the non-accelerating inflation rate of unemployment represents the rate of unemployment at whish inflation will stabilise. The NAIRU theory was used to explain the stagflation phenomenon of the 1970’s when the Phillips Curve could not . According to the theory it is explainable why there is a simulataneous high unemployment and high inflation because workers can change their inflation expectations , therefore increasing the prevailing rate of inflation. This situation changed the idea that the Phillips curve is a stable and good predictable policy tool.
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'Non-accelerating Inflation Rate of Unemployment (nairu)'
However there is a trade-off between inflation and unemployment in the short-run. As ouptput increses , unemployment decreases , therefore the spending within the economy will increase and the price levels will increase consequently.Moreover , according to economists ,it cannot be a trade-off between inflation and unemployment in the long run . An increase in unemployment can lead to a decrease in inflation only on the short run. Thus , in the long run , inflation and unemployment are not connected.
The reason why in the short-run , the curve shifts is due to changes in inflation which occurs when workers will realise when their nominal wage will change if inflation increases as real wages decrease as a consequence. As such they will ask for a higher nominal wage in order to keep unchanged their real wage , causing the production costs to increase and the profits to decrease.
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As the matter of exploiting the Phillips Curve ,it became accepted the fact that policy-makers can exploit the trade off between unemployment and inflation because more unemployment means less inflation. The short-run Phillips curve depicts the relationship between inflation and unemploymanet rates. The long run Phillips curve is a vertical line that shows there isn’t a constant trade-off between inflation and unemployment whereas the short run Phillips curve iis differently shaped, looking like an L .As unemployment rates becomes smaller , inflation increases and vice-versa.
