Nonaccelerating inflation rate of employment
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The NAIRU is short for the nonaccelerating inflation rate of unemployment. Gregory Mankiw believes the NAIRU to be a valuable forecasting tool for monetary policymakers. "When employment is below the NAIRU, inflation can be expected to rise, and when it is above the NAIRU, inflation can be expected to fall."
The inflation-unemployment tradeoff that the NAIRU shows is an important concept in macroeconomic theory. What I mean by the inflation-unemployment tradeoff is that low unemployment leads to high inflation and vice versa. Many economists worry that if inflation falls below the natural rate so that output grows above its long-term potential rate, inflation would increase as bottlenecks in production, capacity limits and tight labor market would lead workers to require higher wages and firms to increase price as demand and costs increase.
The NAIRU shows the effects of monetary and other policies that influence the aggregate demand for goods and services. In the long run money is neutral and should only affect changes in the price level, not production or employment. But this theory doesn't hold in the short run and so inflation and unemployment are pushed in opposite directions.
The NAIRU has also been linked to productivity growth...