PROBLEMS AND APPUCATIONS

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PROBLEMS AND APPUCATIONS 1. Suppose the natural rate of unemployment is 6 percent. On one graph, draw two Phillips curves that describe the four situations listed here. Label the point that shows the position of the economy in each case. a. Actual inflation is 5 percent and expected inflation is 3 percent. b. Actual inflation is 3 […]

QUESTIONS FOR REVIEW

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QUESTIONS FOR REVIEW 1.’ Draw the short-sun trade-off between inflation and unemployment. How might the Fed move the economy from one point on this curve to another? 2. Draw the long-run trade-off between inflation and unemployment. Explain how the short-run and long run trade-offs are related? 3. What is natural about the natural rate of unemployment? Why […]

CONCLUSION

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CONCLUSION This chapter has examined how economists’ thinking about inflation and unemployment has evolved. We have discussed the ideas of many of the best economists of the 20th century: from the Phillips curve of Phillips, Samuelson, and Solow, to the natural-rate hypothesis of Friedman and Phelps, to the rational expectations theory of Lucas, Sargent, and Barro. Four of […]

CASE STUDY

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CASE STUDY WHY WERE INFLATION AND UNEMPLOYMENT 50 LOW AT THE END OF THE 19905? As the 20th century drew to a close, the U.S. economy was experiencing some of the lowest rates of inflation and unemployment in many years. In 1999, for instance, unemployment had fallen to 4.2 percent. while inflation was running at a mere […]

In The News

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In The News The Case for Inflation Targeting As this book was going to press,Alan Greenspan’s tenure as Fed chairman was coming to a dose. This Artie, three economists offer his successor some advice. In October 2005, President Bush nominated Greenspan’s successor.Ben Bemanke, the first author of this artice. What Happens When Greenspan Is Gone AU. […]

THE GREENSPAN ERA

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THE GREENSPAN ERA Since the OPEC inflation of the 1970s and the Volcker disinflation of the 1980s, the U.S. economy has experienced relatively mild fluctuations in inflation and unemployment. Figure 12 shows inflation. Figure 12 The Greenspan Era This figure shows annual data from 1984 to 2004 on the unemployment rate and on the inflation rate […]

THE VOLCKER DISINFLATION

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THE VOLCKER DISINFLATION As we have seen, when Paul Volcker faced the prospect of reducing inflation room Its peak of about I percent, the economics profession offered two conflicting predictions. One group of economists offered estimates of the sacrifice ratio and concluded that reducing inflation would have great cost in terms . output and high unemployment Another group […]

RATIONAL EXPECTATIONS AND THE POSSIBILITY OF COSTLESS DISINFLATION

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RATIONAL EXPECTATIONS AND THE POSSIBILITY OF COST LESS DISINFLATION Just as Paul Volcker was pondering how costly reducible inflation might be, a group of economics professors was leading an intellectual revolution that would challenge the conventional wisdom on the sacrifice ratio. This group included such prominent economists as Robert Lucas, Thomas Sargent, and Robert Barro. Their revolution was […]

THE SACRIFICE RATIO

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THE SACRIFICE RATIO To reduce the inflation rate, the Fed has to pursue contraction monetary policy. Figure 10 shows some of the effects of such a decision. When the Fed slows the rate at which the money supply is growing, it contracts aggregate demand The fall in aggregate demand, in turn, reduces the quantity of goods and services […]

THE COST OF REDUCING INFLATION

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THE COST OF REDUCING INFLATION In October 1979, as OPEC was imposing adverse supply shocks on the world’s economies for the second time in a decade, Fed Chairman Paul Volcker decided that the time for action bad come. Volcker bad been appointed chairman by President Carter only two months earlier, and be bad taken the job knowing […]