s lead to longer-run failures in maintaining low inflation. Another kind of conflict involves the potential for pressure from the political arena. For example, in the day-to-day course of governing the country and making economic policy, politicians may be tempted to put the emphasis on short-run results rather than on the longer-run health of the economy. The government is somewhat insulated from such pressure, however, by its independence, which allows it to achieve a more appropriate balance between short-run and long-run objectives. When unemployment is high the policy that should take place is inflation should increase slightly to drive up prices in order to cause increases in output. When unemployment is below average and nearing full employment the policy that should take place is to slightly lower the productivity of the workers and therefore cause a decrease in the output. This would slow the economy down and into the ideal condition of maximum employment. When the production is at its maximum and unemployment at a minimum the government must raise the inflation rate in order to make sure that the situation stays where it is. It must be sure not to raise inflation too sharply or else everyone will be afraid to spend their money. The belief that a 4% unemployment rate and stable prices are inconsistent is shaped by the widely accepted "natural rate hypothesis." It argues that monetary policy has no effect on the economy's unemployment rate, which is often called the natural rate of unemployment. The reason is that, in the long run, unemployment depends on so-called "real" factors--such as technology and people's preferences for saving, risk, and work effort; these factors are beyond the reach of monetary policy. Most current estimates place the natural rate of unemployment in the range of 5-6%. Cons...
