CHAPTER 33THE SHORT-RUN TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT783CASE STUDYWHY WERE INFLATION AND UNEMPLOYMENTSO LOW AT THE END OF THE 1990S?As the twentieth century drew to a close, the U.S. economy was experiencingsome of the lowest rates of inflation and unemployment in many years. In 1999,for instance, unemployment had fallen to 4.2 percent, while inflation wasrunning a mere 1.3 percent per year. As measured by these two importantmacroeconomic variables, the United States was enjoying a period of unusualprosperity.Some observers argued that this experience cast doubt on the theory of thePhillips curve. Indeed, the combination of low inflation and low unemploymentmight seem to suggest that there was no longer a tradeoff between thesetwo variables. Yet most economists took a less radical view of events. As wehave discussed throughout this chapter, the short-run tradeoff between infla-tion and unemployment shifts over time. In the 1990s, this tradeoff shifted left-
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