When the economy is booming, the government will have more money than it needs, so

it should save and cut spending. This has two consequences: economic contraction and
the need to save for bust cycles. Less government spending (which accounts for a large
portion of the economy) leads to less economic activity, reducing the length of the boom
cycle. By preventing the economy from overheating, the inevitable bust will be less
severe and painful. When the economy goes bust, the savings from government cuts can
be used to restore the economy to its natural state. In a boom, the most basic
understanding of what a government should do is cut spending to create a budget
surplus

1. . What is NAIRU?
It is an acronym for Non Accelerating Inflation Rate of Unemployment. It is the lowest level
of unemployment that economy can bear before which wage inflation began to accelerate.
NAIRU can also be defined as specific unemployment rate at which the rate of inflation
neither increase neither decrease. So, NAIRU is a bare minimum level of joblessness that
makes room for people to keep changing job before inflation pressure starts catching up. It
is theoretical but helps in shaping the monetary policy. NAIRU is shown graphically as the
level of unemployment at the prevailing long run Phillips curve (LRPC).
It will matter when RBI want to hike interest rate. It is one of the leading indicators of wage
inflation. As rate hike takes time to affect the economy, RBI wants to begin gradual
normalization of rates before inflationary pressure start to build.
Being theoretical concept and even RBI cannot pinpoint it. Suppose India is adding jobs at
healthy rate, so unemployment rate is lower. This indicator suggest that labour market is
robust and in line with period of economic expansion. On the other hand, wage growth may
be stuck barely matching the pace of inflation. This is where concept of NAIRU is useful.
Also, one observation is that when unemployment rates fall close to NAIRU then wages
tend to rise. Conversely, when unemployment rates move away from NAIRU then wage
pressure has subsided.

Using logical interpretation of data provided in the following articles, what do you

 Weaker wage growth may be due to a slowdown in productivity gains.

When value produced by labour is less then there is a slowdown in wage growth.
 There may be some random fluctuation in the productivity data, but it can be
shown based on analysis that movement in productivity growth is less than a
percentage point from its 2001 level. This slowdown is another puzzle for
economist and this trend is visible across most advanced economies. The Current
Population Survey does not track worker productivity, but it shows wage growth
down from its level in 2001. We would have expected that high skilled occupation
would be more productive and hence higher wage growth than 2001. But 2018
data shows that this is not the case. So across all occupation, productivity
slowdown can be major factor in slow wage growth.
 Weaker wage growth is indirectly connected to inequality and lower labour
bargaining power.
Since 2001, income inequality is rising, and union membership is reducing. This may
have indirect effect on lower wage growth i.e. less upward mobility and lower
bargaining power.
 Weaker wage growth due to employer concentration
Only few firms are present in market which is an increasing concern for labour
market which may affect weaker wage growth

All this hypothesis may not be independent i.e. slack labour market may
In a bust cycle, the economy produces less than its natural output, and the population
and government face difficult times. To help the people, the economy, and the
government itself, the government must spend more money than it has to compensate
for the economic downturn. The government should spend enough to keep the economy
at its natural level, and the surplus from the years of economic boom should be used to
fund this. The government then restarts this process and begins to cut spending once
the economy has returned to its natural state. In other words, the government will run a
deficit until the economy improves and the deficit shrinks (this would be financed
through savings like intergovernmental loans and actual borrowing).

The American government followed