IS-LM-PC Model

Natural Rates

• unemployment and production

$$Y_n=N_n=(1-u_n)L$$

• output gap: $Y-Y_n$
  • should be as close to 0 as possible → healthy economy
• following that: $Y-Y_n=-L(u-u_n)$
  • when output gap positive: overheated economy
    • inflationary pressure
    • overheated economy … more demand than supply
  • when output gap negative: recession