The higher the share of youth in the population, the lower the non-accelerating inflation rate of unemployment. As a rule of thumb, current conditions suggest that for every point that unemployment is below the full employment level, inflation will increase by 0.5 percentage points per year. The Federal Reserve s only priority is attaining full employment in the economy. If the government cuts spending to reduce the deficit, the Fed will most likely raise interest rates to make sure the cut in spending doesn t lead to inflation.
Fiscal policy is more effective when consumers marginal propensity to consume is higher.
Explain why the rate of change in wages depends on the difference between the unemployment rate and the voluntary unemployment rate. Solve for the change in price inflation as a function of involuntary unemployment. Solve for national income as a function of the unknown variables, i and T. 2. Now assume that the government budget is balanced, and write income as a function of the interest rate. Plot this curve in i-Y space.