Why would you expect the inflation rate to accelerate if the actual unemployment rate declined to a level

Question

lower than the "full employment" unemployment (NAIRU at natural RGDP)?

Answer 1

Inflation and employment are not linked -- other than by choice of the Federal Reserve. If the supply of money didn't grow rapidly, you would not have inflation irrespective of how little unemployment there were.

Answer 2

1) Inflation may be the case (side effect) for gov policy to achieve lower unemployment rate using expansionary monetary policy (though such effect is only temporary - in short-run). It also involves rational expectations theory and money-illusion issue.

2) Low supply of free labor will lead to increase in wages - thus higher disposable income which consequently leads to increase in price levels.

It all summed in Philips curve approach:

http://en.wikipedia.org/wiki/Philips_cur...

Answer 3

Wages would inevitably go up because of shortages of qualified workers and those cost would be past on to the products and services they provide.