Principles of Economics- Mankiw (5th) 755

Principles of Economics- Mankiw (5th) 755 - CHAPTER 33 T H...

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CHAPTER 33 THE SHORT-RUN TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT 779 falls, and the short-run Phillips curve shifts downward. The economy moves from point B to point C. Inflation is lower, and unemployment is back at its natural rate. Thus, if a nation wants to reduce inflation, it must endure a period of high un- employment and low output. In Figure 33-10, this cost is represented by the move- ment of the economy through point B as it travels from point A to point C. The size of this cost depends on the slope of the Phillips curve and how quickly expecta- tions of inflation adjust to the new monetary policy. Many studies have examined the data on inflation and unemployment in or- der to estimate the cost of reducing inflation. The findings of these studies are of- ten summarized in a statistic called the sacrifice ratio. The sacrifice ratio is the number of percentage points of annual output lost in the process of reducing in- flation by 1 percentage point. A typical estimate of the sacrifice ratio is 5. That is,
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