Based on according to the U.S. Bureau of Labor Statistics the unemployment rate for Dec 2017 was 4.1% while the NAIRU was 4.73%. This means that the rate was below NAIRU. This is because the inflation rate in the country is above the non-accelerating rate. This could be due to the increase in government spending in a bid to boost the economy.
A) Why would you expect the inflation rate to accelerate if the actual unemployment rate declined to a level lower than the “full employment” unemployment rate (NAIRU) and remained at that low level for a year or longer? Explain your answer in a few sentences.
B) Draw an AS/AD diagram illustrating your answer to part (A) and refer to the current state of the economy of the US to compare in this context. Be sure to label all lines and axes in your diagram clearly.