CHAPTER 33THE SHORT-RUN TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT781The figure shows that the Volcker disinflation did come at the cost of highunemployment. In 1982 and 1983, the unemployment rate was about 10 percent—almost twice its level when Paul Volcker was appointed Fed chairman. At the sametime, the production of goods and services as measured by real GDP was wellbelow its trend level. (See Figure 31-1 in Chapter 31.) The Volcker disinflationproduced the deepest recession in the United States since the Great Depression ofthe 1930s.Does this experience refute the possibility of costless disinflation as suggestedby the rational-expectations theorists? Some economists have argued that the an-swer to this question is a resounding yes. Indeed, the pattern of disinflation shownin Figure 33-11 is very similar to the pattern predicted in Figure 33-10. To make thetransition from high inflation (point A in both figures) to low inflation (point C),the economy had to experience a painful period of high unemployment (point B).
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