Non accelerating rate of unemployment(NAIRU) question

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dont know it
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If NAIRU> actual unemployment rate, inflation rises. Why is that the case?
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jpt4749
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If I’m not mistaken when natural rate of unemployment exceeds actual unemployment that means actual GDP is greater than trend / potential GDP and that leads inflation to rise accordingly since people have higher purchasing power.

In other words when U* > U = Y* < Y
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tatano
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Production in an economy takes many inputs. One of the most important ones is labour. In a representative agent model, for example, you might have a production function of the following form: F(K,L), where K is capital and L is labour.
The NAIRU is simply the level of unemployment at which output is at its long run level, or on trend. The reason why at the steady state we have unemployment (NAIRU>0) is structural unemployment and frictional unemployment.
As Nathan said, being below the NAIRU is just another way of saying that the economy is above trend.
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(Original post by Nathan9087)
If I’m not mistaken when natural rate of unemployment exceeds actual unemployment that means actual GDP is greater than trend / potential GDP and that leads inflation to rise accordingly since people have higher purchasing power.

In other words when U* > U = Y* < Y

Thanks. I'm still a bit confused. To me it would make more sense looking at it the other way around. So if an economy's potential growth is higher than its current growth, wouldn't there still be spare capacity to utilise as opposed to if current growth exceeded trend growth?
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(Original post by tatano)
Production in an economy takes many inputs. One of the most important ones is labour. In a representative agent model, for example, you might have a production function of the following form: F(K,L), where K is capital and L is labour.
The NAIRU is simply the level of unemployment at which output is at its long run level, or on trend. The reason why at the steady state we have unemployment (NAIRU>0) is structural unemployment and frictional unemployment.
As Nathan said, being below the NAIRU is just another way of saying that the economy is above trend.
Thanks.
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jpt4749
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(Original post by dont know it)
Thanks. I'm still a bit confused. To me it would make more sense looking at it the other way around. So if an economy's potential growth is higher than its current growth, wouldn't there still be spare capacity to utilise as opposed to if current growth exceeded trend growth?
From my point of understanding

Yes when potential GDP is greater than real GDP then there is a spare capacity but the current level of productive capacity prevents the economy from being able to achieve the desired level.

In other words I regard potential / trend GDP level as the ideal level so when Y > Y* that means the economy is able to operate more than standard level and people have higher purchasing power due to greater purchasing power.

I hope this can help clarify and sorry if this make it more confusing for you haha 😊
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