Consider the following statements regarding NAIRU I When the monetary policy tried to hold...........

Finance (Phase -I & II) Inflation Trends

Consider the following statements regarding NAIRU:

I. When the monetary policy tried to hold unemployment below its natural rate, inflation will be rising to higher level called -accelerating inflation rate of unemployment (NAIRU).

II. The NAIRU is that rate of unemployment which is consistent with a constant rate of inflation.

III. The NAIRU is the lowest unemployment rate that an economy can sustain without any upward pressure on inflation rate.

Which of the following statement(s) is/are correct?

Only I

I and II

II and III

All of the above

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Explanation:

According to the American economists, Milton Friedman and Edmund Phelps if monetary policy tried to hold unemployment below its natural rate, inflation will be rising to higher level—which is known as the non-accelerating inflation rate of unemployment (NAIRU) also. The NAIRU is that rate of unemployment which is consistent with a constant rate of inflation. It means at NAIRU, the upward and downward forces on price (inflation) and wage (unemployment) neutralise each other and there is no tendency of change in the rate of inflation. We may say that the NAIRU is the lowest unemployment rate that an economy can sustain without any upward pressure on inflation rate.