EC140 Chapter Notes - Chapter 30: Falla Monument, Longrun, Shortage
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EC140 Full Course Notes
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Recall that inflation is a rise in the average level of prices (i. e. , a rise in the price level) Any inflation that we have so far seen in our macroeconomic model was temporary it existed only while the economy was adjusting toward its long-run equilibrium. In this chapter we modify our model to explain how sustained and constant inflation can exist. The two main forces that we consider are the output gap and expectations of future inflation. When y = y*, the unemployment rate is said to be equal to the nairu: nairu: non-accelerating inflation rate of unemployment (u*, also known as the natural rate of unemployment. The nairu is not zero even when y = y*, there may be a substantial amount of frictional and structural unemployment. When y > y*, the unemployment rate will be less than nairu (u < u*) When y < y*, the unemployment rate will exceed nairu (u > u*)
