Macroeconomics, 2nd Edition by Pearson

220

MACROECONOMICS

Panel C again is a 45-degree line that transfers the level of unemployment from

the vertical axis of panel B to the horizontal axis of panel D. Associated with

the natural rate of employment,

N

* when the price level in the economy is

p

0

,

is the natural rate of unemployment

U

* in panel D. The combination

p

0

and

U

*

in panel D at point E

'

represents a combination of price level and unemploy-

ment, which depicts one point among the possible trade-offs between prices

and unemployment.

If the actual price rises to

p

1

, for given price expectation

p

0

e

, the

demand and supply of labour equilibrate ...