Prin10 - Principles of Economics by N Gregory Mankiw The...

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Principles of Economics by N Gregory Mankiw The Video Series script Principle #10: Society Faces a Short-Run Tradeoff between Inflation and Unemployment In 1979, members of the OPEC oil cartel raised oil prices substantially for the second time in the decade, sending shock waves through the U.S. economy. Inflation -- the rate at which the prices of goods and services are rising – had risen steadily in the United States over the 1970’s. After the increase in oil prices, inflation reached a rate of more than ten percent per year. Of course, inflation can only continue if there is rapid growth in the money supply. But in the short run, policymakers face a tradeoff between inflation and unemployment. The Phillips curve shows policymakers’ tradeoffs by showing the combinations of inflation and unemployment that are possible in the short run. Graphically, with inflation on the vertical axis and unemployment on the horizontal axis, the Phillips Curve could look like this. In the short run, in order to reduce inflation, the Phillips Curve says that policymakers must allow unemployment to rise. The short run Phillips Curve shifts upward when there are adverse shocks to aggregate supply. The OPEC decision, which raised oil prices and
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Prin10 - Principles of Economics by N Gregory Mankiw The...

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