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Principles of Economics- Mankiw (5th) 759

Principles of Economics- Mankiw (5th) 759 - CHAPTER 33 T H...

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CHAPTER 33 THE SHORT-RUN TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT 783 CASE STUDY WHY WERE INFLATION AND UNEMPLOYMENT SO LOW AT THE END OF THE 1990 S ? As the twentieth century drew to a close, the U.S. economy was experiencing some of the lowest rates of inflation and unemployment in many years. In 1999, for instance, unemployment had fallen to 4.2 percent, while inflation was running a mere 1.3 percent per year. As measured by these two important macroeconomic variables, the United States was enjoying a period of unusual prosperity. Some observers argued that this experience cast doubt on the theory of the Phillips curve. Indeed, the combination of low inflation and low unemployment might seem to suggest that there was no longer a tradeoff between these two variables. Yet most economists took a less radical view of events. As we have 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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