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Measuring the Economy 2

Problems

The Tradeoff Between Inflation and Unemployment

Review Test

Problem : What relationship does the Phillips curve describe?

The Phillips curve describes the relationship between inflation and unemployment.

Problem : Explain the chain of events that underlies the relationship between inflation and unemployment described by the Phillips curve.

As more people work, the national output increases, causing wages to increase, causing consumers to have more money to spend more, resulting in consumers demanding more on goods and services, finally causing the prices of goods and services to increase, that is, inflation.

Problem : What is the equation for the Phillips curve?

The equation for the Phillips curve is (inflation) = (expected inflation) - B * (cyclical unemployment rate) + (error).

Problem : Define stagflation and explain its implications.

Stagflation is the situation in which both inflation and unemployment increase. It is a phenomenon that raises questions about the general applicability of the Phillips curve.

Problem : How is the Phillips curve best used?

The Phillips curve is useful not as a means of picking an unemployment and inflation rate pair, but rather as a means of understanding how unemployment and inflation might move given historical data.

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