on and unemployment is shown on the Phillips curve. According to the non-accelerating inflation rate of unemployment, the curve is straight (Graph 1). This indicates that if the central bank increases inflation, there is no reduction in the unemployment rate. Conversely, lowering the inflation rate also has no effect on unemployment. This means that the inflation rate cannot be manipulated to lower unemployment. According to the natural rate of unemployment, the interaction of demand firms' and supply of labor determine the level of unemployment. There is always some unemployment resulting from workers failing to hook up with potential employers due to imperfect information. However, neither the demands nor supplies of labor nor the pattern of information among firms and employees is affected by inflation. Hence, inflation cannot affect the level of employment and unemployment and the Phillips curve is as shown. Both inflation and deflation have no affect on unemployment and output. Therefore, from this standpoint, all rates of inflation are optimal. Inflation simply does not matter. Another version of this theory maintains that the optimal rate of inflation is the actual rate. For example, if an economy currently has a 6-percent inflation rate, 6 percent is the optimal rate. The inflation itself does not matter and in the long run the Phillips curve is vertical but, lowering the equilibrium rate of inflation results in lower output. It is costly to lower inflation because economic agents have inflation expectations, which are difficult to adjust. A period of higher unemployment results from getting agents to lower expectations and this implies lost output. Since there is no benefit to reducing inflation, the implication is evident - the Fed should stick with the actual rate. There are also many economists who would agree with the claim that zero inflation is the optimal rate of inflation. This claim employs a differe...
