Principles of Economics- Mankiw (5th) 757

Principles of Economics- Mankiw (5th) 757 - CHAPTER 33 T H...

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CHAPTER 33 THE SHORT-RUN TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT 781 The figure shows that the Volcker disinflation did come at the cost of high unemployment. In 1982 and 1983, the unemployment rate was about 10 percent— almost twice its level when Paul Volcker was appointed Fed chairman. At the same time, the production of goods and services as measured by real GDP was well below its trend level. (See Figure 31-1 in Chapter 31.) The Volcker disinflation produced the deepest recession in the United States since the Great Depression of the 1930s. Does this experience refute the possibility of costless disinflation as suggested by the rational-expectations theorists? Some economists have argued that the an- swer to this question is a resounding yes. Indeed, the pattern of disinflation shown in Figure 33-11 is very similar to the pattern predicted in Figure 33-10. To make the transition 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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