The term NAIRU is an acronym for Non-Accelerating Inflation Rate of Unemployment. It is a concept in economic theory significant in the interplay of macroeconomics and microeconomics. This "full employment" unemployment rate is sometimes termed the "natural rate of unemployment" or the "inflation-threshold unemployment rate": if actual unemployment falls below the NAIRU, the inflation rate is likely to rise quickly (accelerate). In terms of output, the NAIRU corresponds to potential output, the highest level of real gross domestic product that can be sustained at any one time. This is also called the "natural gross domestic product." Acronyms and initialisms are abbreviations formed from the initial letter or letters of words, such as NATO and XHTML, and are pronounced in a way that is distinct from the full pronunciation of what the letters stand for. ... World inflation rate, based on CIA factbook figures In economics, inflation is simply an increase in the money supply. ... An 1837 political cartoon about unemployment in the United States. ... Buyers bargain for good prices while sellers put forth their best front in Chichicastenango Market, Guatemala. ... Macroeconomics is the economics sub-field of study that considers aggregate behavior, and the study of the sum of individual economic decisions. ... Microeconomics (very small economics) is a social science which involves study of the economic distribution of production and income among individual consumers, firms, and industries. ... In economics, full employment has more than one meaning. ... In economics, potential output refers to the highest level of real Gross Domestic Product that can be sustained. ... A regions gross domestic product, or GDP, is one of several measures of the size of its economy. ... Natural gross domestic product (natural GDP) is defined as the optimal production capacity of a territorys economy given natural and institutional constraints. ...

The concept arose in the wake of the popularity of the Phillips curve which summarized the observed negative correlation between the rate of unemployment and the rate of inflation (measured as annual nominal wage growth of employees) for a number of industrialised countries with more or less mixed economies. This correlation (previously seen for the U.S. by Irving Fisher) persuaded some analysts that it was impossible for governments simultaneously to target both arbitrarily low unemployment and price stability, and that, therefore, it was government's role to seek a point on the trade-off between unemployment and inflation which matched a domestic social consensus. In macroeconomics, the Phillips curve is a supposed inverse relationship between inflation and unemployment. ... An industry is generally any grouping of businesses that share a common method of generating profits, such as the music industry, the automobile industry, or the cattle industry. It is also used specifically to refer to an area of economic production focused on manufacturing which involves large amounts of capital... A mixed economy is an economy that contains both private and public, or state owned (or controlled) enterprises. ... Irving Fisher (February 27, 1867 Saugerties, New York — April 29, 1947, New York) was an American economist, health campaigner, and eugenicist. ... A Tradeoff usually refers to losing one quality or aspect of something in return for gaining another quality or aspect. ...

During the 1970s in the United States and several other industrialized countries, Phillips curve analysis became less popular, because inflation rose at the same time that unemployment rose. (See stagflation.) Worse as far as many economists were concerned, the Phillips curve had little or no theoretical basis. Critics of this analysis (such as Milton Friedman and Edmund Phelps) argued that the Phillips curve could not be a fundamental characteristic of economic general equilibrium because it showed a correlation between a real economic variable (the unemployment rate) and a nominal economic variable (the inflation rate). Their counter-analysis was that government macroeconomic policy (primarily monetary policy) was being driven by a low unemployment target and that this caused expectations of inflation to change, so that steadily accelerating inflation rather than reduced unemployment was the result. The resulting prescription was that government economic policy (or at least monetary policy) should not be influenced by any level of unemployment below a critical level - the "natural rate" or NAIRU. Stagflation is a term in macroeconomics used to describe a period characteristic of high inflation combined with economic stagnation, unemployment, or economic recession. ... Milton Friedman Milton Friedman (born July 31, 1912) is a U.S. economist, known for his work on macroeconomics, microeconomics, economic history, statistics, and for his advocacy of laissez-faire capitalism. ... Edmund Phelps worked in economics and was recognized for his work on economic growth at Yale’s Cowles Foundation in the 1960s. ... General Equilbrium (linear) supply and demand curves. ... In economics, adaptive expectations means that people base their expectations of what will happen in the future based on what has happened in the past. ...

If U* is the NAIRU and U is the actual unemployment rate, the theory says that:

if U < U* for a few years, inflationary expectations rise, so that the inflation rate tends to accelerate;

if U > U* for a few years, inflationary expectations fall, so that the inflation rate tends to slow (there is disinflation); and

if U = U*, the inflation rate tends to stay the same, unless there is an exogenous shock.

Most economists do not see the NAIRU theory as explaining all inflation. Instead, it is possible to move along a short run Phillips Curve (even though the NAIRU theory says that this curve shifts in the longer run) so that unemployment can rise or fall due to changes in inflation. Exogenous supply-shock inflation is also possible, as with the "energy crises" of the 1970s. Disinflation is a decrease in the rate of inflation. ... Exogenous (or exogeneous) (from the Greek words exo and gen, meaning outside and production) refers to an action or object coming from outside a system. ...

The NAIRU theory mainly intended as an argument against active Keynesian demand management and in favor of free markets (at least on the macroeconomic level). There is for instance no theoretical basis for predicting the NAIRU. Monetarists instead support the generalized assertion that the correct approach to unemployment is through microeconomic measures (to lower the NAIRU whatever its exact level), rather than macroeconomic activity based on an estimate of the NAIRU in relation to the actual level of unemployment. Monetary policy should aim instead at stabilizing the inflation rate. Keynesian economics, or Keynesianism, is an economic theory based on the ideas of John Maynard Keynes, as put forward in his book The General Theory of Employment, Interest and Money, published in 1936 in response to the Great Depression of the 1930s. ... Monetarism is a set of views concerning the determination of national income and monetary economics. ...

See also

• Okun's Law
• Differences between the Natural Rate of Unemployment and the NAIRU