KW_Macro_Ch_16_Sec_03_Moderate_Inflation_and_Disinflation -...

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>> Inflation, Disinflation, and Deflation Section 3: Moderate Inflation and Disinflation chapter 16 The governments of wealthy, politically stable countries like the United States and Britain don’t find themselves forced to print money to pay their bills. Yet over the past 40 years both countries, along with a number of other nations, have experienced uncomfortable episodes of inflation. In the United States, the inflation rate peaked at 13% at the beginning of the 1980s. In Britain, the inflation rate reached 26% in 1975. Why did policy makers allow this to happen? To understand inflation rates in such cases, it is helpful to shift our focus away from the link between money and prices and look at the policy trade-offs that gov- ernments face.
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2 CHAPTER 16 SECTION 3: MODERATE INFLATION AND DISINFLATION Causes of Moderate Inflation In Chapter 15 we learned that most economists believe that in the short run there is a trade-off between unemployment and inflation. If the government makes an effort to keep unemployment below the natural rate of unemployment, the short-run Phillips curve implies that this will lead to a higher inflation rate than people expect. Over time, however, people will come to expect this higher level of inflation, and the short-run Phillips curve will shift upward. If the government insists on keeping unem- ployment below its natural rate, this will lead to further increases in expected infla- tion, and so on. So keeping unemployment below its natural rate requires an ever-higher rate of inflation. This analysis suggests that policy makers should not try to achieve an unemploy-
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This note was uploaded on 04/10/2008 for the course ECONOMICS 103 taught by Professor Sheflin during the Spring '08 term at Rutgers.

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KW_Macro_Ch_16_Sec_03_Moderate_Inflation_and_Disinflation -...

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