In Chapter 15 we explored the possibility of a tradeoff between inflation and unemployment. A key element of the discussion was the "natural rate of unemployment", the unemployment rate that would exist in the absence of any cyclical unemployment. An alternative concept relating inflation and unemployment rate is the NAIRU, the "nonaccelerating-inflation rate of unemployment". To understand the NAIRU, we can read a passage from the Economic Report of the President, 1998.

Click on Chapter 2 "Macroeconomic Policy and Performance," and about 1/3 of the way through the chapter is the section titled "Recent Inflation Performance and the NAIRU." Read the passage and then answer the following questions:

Questions

1. Define the NAIRU.
2. Is the NAIRU a constant over time? Why or why not?
3. How could "special transitory factors" make short-run changes in inflation and the unemployment rate seem inconsistent with the NAIRU expected to exist? In other words, how could we experience low inflation today, yet the current unemployment rate is actually too low to be consistent with low inflation in the future?
4. At the time this passage was written, what did the Clinton Administration believe to be a reasonable value for the NAIRU?