Chapter 17, Problem 3P

To determine

To explain:

The effect of fall in fractional unemployment on the natural rate of unemployment and the Philips curve of the economy.

Concept introduction:

Natural Rate of Unemployment: The natural rate of unemployment is the rate of unemployment that corresponds to potential GDP or, equivalently, long-run aggregate supply. In other words, the natural rate of unemployment exists when the economy is in neither a boom nor a recession. It is a combination of frictional and structural unemployment.

Frictional Unemployment: The unemployment that exists in the economy due to people being in the process of shifting from one job to another.

Structural Unemployment: This form of unemployment arises when there is a mismatch between the skills that workers in the economy can offer, and the skills of workers demanded by the employers.

Phillips Curve Analysis: The Phillips curve is an economic concept developed by A. W. Phillips that shows the existence of a stable and inverse relationship between inflation and unemployment. According to the theory, with economic growth comes inflation, which, in turn, leads to more jobs and less unemployment. This is a short-run analysis.