UK Inflation, NAIRU, and Real Oil Prices (1971–2022) [Figure 4.23]

An economy's central bank observes that the actual measured unemployment rate has been 4% for the past year. Their economists have calculated that the specific unemployment rate at which inflation would remain constant is 5.5%. If no new policies are implemented and this economic situation persists, what is the most likely outcome for the inflation rate?

A government successfully implements a new policy that improves the efficiency of the job-matching process between employers and unemployed workers. In the long run, this policy would likely cause the Non-Accelerating Inflation Rate of Unemployment (NAIRU) to decrease.

Interpreting a Shift in Structural Unemployment

Distinguishing Between Unemployment Measures

Evaluating the Practicality of NAIRU in Policymaking

Consider an economy where the unemployment rate is 5% and the inflation rate has been stable for several years. A new government policy is then implemented that significantly increases the negotiating power of labor unions across most industries. Assuming the actual unemployment rate in the economy remains at 5% following this policy change, what is the most probable outcome for the inflation rate?

Evaluating Policy Responses to Inflation

Match each economic scenario with its most likely macroeconomic outcome, based on the relationship between the actual unemployment rate, the equilibrium rate of unemployment, and inflation.

An economist is analyzing two data series for a country's unemployment over a 30-year period.

• Series A shows significant fluctuations from year to year, rising sharply during recessions and falling during economic expansions.
• Series B shows a much more gradual, smoother trend over the same period, with only slow changes over many years.

Based on the properties of these two series, which statement provides the most accurate identification and reasoning?

When an economy's actual unemployment rate is equal to its estimated equilibrium or structural rate of unemployment, the rate of inflation is expected to be ________.

Figure 5.6: Unemployment, NAIRU, and Inflation in Canada (1985–2022)