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Principles of Economics- Mankiw (5th) 753

Principles of Economics- Mankiw (5th) 753 - CHAPTER 33 T H...

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CHAPTER 33 THE SHORT-RUN TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT 777 accommodate the supply shock with higher money growth. (As we saw in Chap- ter 31, policymakers are said to accommodate an adverse supply shock when they respond to it by increasing aggregate demand.) Because of this policy decision, the recession that resulted from the supply shock was smaller than it otherwise might have been, but the U.S. economy faced an unfavorable tradeoff between inflation and unemployment for many years. The problem was compounded in 1979, when OPEC once again started to exert its market power, more than doubling the price of oil. Figure 33-9 shows inflation and unemployment in the U.S. economy during this period. In 1980, after two OPEC supply shocks, the U.S. economy had an inflation rate of more than 9 percent and an unemployment rate of about 7 percent. This combi- nation of inflation and unemployment was not at all near the tradeoff that seemed possible in the 1960s. (In the 1960s, the Phillips curve suggested that an unem-
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