An increase in the natural unemployment rate shifts

Question

Quizplus · Accepted Answer

An increase in the natural unemployment rate, also known as the non-accelerating inflation rate of unemployment (NAIRU), indicates that the economy's potential output has decreased. As a result, firms will have lower expectations for sales and profits, leading to a decrease in aggregate demand. This decrease in demand will lead to a decrease in prices and wages in the short-run, causing the short-run Phillips curve to shift rightward. However, the decrease in potential output will also lead to expectations for lower inflation in the long-run, causing the long-run Phillips curve to shift rightward as well. Therefore, both the short-run and long-run Phillips curves shift rightward.

An Increase in the Natural Unemployment Rate Shifts