mic policy, politicians may be tempted to put the emphasis on short-runresults rather than on the longer-run health of the economy. The government issomewhat insulated from such pressure, however, by its independence, whichallows it to achieve a more appropriate balance between short-run and long-runobjectives. When unemployment is high the policy that should take place is inflationshould increase slightly to drive up prices in order to cause increases inoutput. When unemployment is below average and nearing full employment thepolicy that should take place is to slightly lower the productivity of theworkers and therefore cause a decrease in the output. This would slow theeconomy down and into the ideal condition of maximum employment. When theproduction is at its maximum and unemployment at a minimum the government mustraise the inflation rate in order to make sure that the situation stays where itis. It must be sure not to raise inflation too sharply or else everyone will beafraid to spend their money. The belief that a 4% unemployment rate and stable prices are inconsistentis shaped by the widely accepted "natural rate hypothesis." It argues thatmonetary policy has no effect on the economy's unemployment rate, which is oftencalled the natural rate of unemployment. The reason is that, in the long run,unemployment depends on so-called "real" factors--such as technology andpeople's preferences for saving, risk, and work effort; these factors are beyondthe reach of monetary policy. Most current estimates place the natural rate ofunemployment in the range of 5?6?. Consistent attempts to expand the economy beyond its potential forproduction will result in higher and higher inflation, while ultimately failingto produce lower average unemployment. Therefore, most economists would arguethat there are no long-term gains from consistently pursuing expansionarypolicies. ...
