1. Olivier Blanchard has referred to a "natural rate of unemployment," a "structural rate of unemployment," a "natural level of output," and a "level of potential output." Perhaps the most precise usage of a term like this is found in what he calls "the non-accelerating inflation rate of unemployment." How does he calculate a formula for this "NAIRU"? In Blanchard's IS-LM-PC model, if the actual rate of unemployment differs from the NAIRU, there is no "natural" tendency for the economy to return to a level of output consistent with the NAIRU. Explain why. In this model, however, monetary policy can return us to the NAIRU and to any unchanging level of inflation we want. How?
2. In the Phillips Curve (equation [2]) in Laurence Meyer's "Monetarism Without Money" model, the actual rate of inflation is governed by the output gap, past inflation, and expected future inflation. How does the inclusion of past inflation capture the role of sticky wages and prices in the short run? Here he must really be talking about sticky rates of growth of wages and prices. Still, we ought to be able to apply the New Keynesian explanations of sticky wages and prices to this. What are the New Keynesian explanations of sticky wages and prices? Why did John Maynard Keynes say that sticky wages and prices are not necessary to have involuntary unemployment?