Explain why it is not a sustainable policy to attempt to keep unemployment below its natural level according to the augmented Phillips Curve model?
Phillips curve model shows the relationship between unemployment and inflation, and interdependence is inversely proportional, ie, with decreasing inflation increases unemployment and vice versa. Thus, establishing natural rate determined desire to find the optimal ratio between the two phenomena. Thus, reducing unemployment below the natural rate will lead to a significant increase in inflation will cause a negative impact on the economy, which override the positive effects of reducing unemployment. Therefore, reduction of unemployment below the natural rate is undesirable.