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non-accelerating inflation rate of unemployment


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(NAIRU)

The unemployment rate at which inflation remains constant. This features in Keynesian models where the rate of inflation depends on demand pressure. In such models, if demand is high, firms aim on average to raise their own prices faster than they expect other prices to increase, which causes inflation to speed up. If demand is low, firms aim on average to raise their own prices more slowly than they expect other prices to increase, which causes inflation to slow down. The NAIRU is the unemployment rate corresponding to a level of demand pressure which causes firms on average to aim to keep their own price increases in line with the price increases they expect elsewhere. This stabilizes the rate of inflation at whatever level it has already reached.

Subjects: Economics.


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