Macroeconomics
unemployment. This concept supports the idea of policy neutrality in the long run, suggesting that policymakers should not relyondemand-sidepoliciesto permanently lower the natural rate of unemployment. Whilechangesintheinflationratedonotaffectthenaturalrateofunemployment, they do impact the overall price level. In the long run, changes in the money supply, productivity, andotherfactorscanleadtochangesinthepricelevel,but these changes are not associated with a trade-off between inflation and unemployment.
In summary, the LRPC provides insights into the long-term relationship between inflation and unemployment.Itemphasizesthat, overextendedperiods,thereisnopermanenttrade-offbetween thesetwovariables,andtheunemploymentrateeventuallysettlesatitsnaturalrate. Thefocusof policymakersinthelongrunshouldbeonfactorsthatinfluencethenaturalrateofunemployment,such as labor market reforms and productivity-enhancing measures, rather than relying solely on demand management policies to reduce unemployment. Shifts of the LRPC LRPCwillonlyshiftwhenfactorsthatcausechangesinthenaturalrateofunemploymentchange. Whenever NRU changes, LRPC shifts in the opposite direction of the shift in LRAS . Forinstance,if LRASincreasesandshiftstotheright,LRPCwillshifttotheleftandsettleatalowerNRU.Alternatively, when LRAS decreases and shifts to the right, LRPC will shift to the right and settle at a higher NRU. ● ChangesintheSizeandQualityoftheLaborForce: Anincreaseinthesizeandqualityoflabor reduces NRU (shifts LRPC to the left) and vice versa. ● Changes in the Quantity and Quality of Capital: An increase in the quantity and quality of capital reduces NRU and vice versa. ● Changes in Productivity: An increase in the productivity of factors of production (i.e., more output per unit of input) reduces NRU and vice versa. ● Changes in Technology: An improvement in technology that facilitates and speeds up production reduces NRU and vice versa. ● Changes in Firms’ Investments: An increase in frms’ investments that contribute to higher output reduces NRU and vice versa. Remember that NRU = frictional unemployment + structural unemployment; therefore, any changes related to these types of unemployment will directly affect NRU too. Cyclical unemployment affects SRPC and not LRPC. The factors that affect NRU and hence LPRC include the following:
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