The Goals of Stabilization Policy: Low Inflation and Low Unemployment
titled “The Treasury Inflation-Protected Securities (TIPS) Has Arrived” in Section 9-4 has
been updated with new data. The explanation time period for TIPS has been extended to the year 2007.
In Section 9-5, the explanation about the government budget constraint equation (Subsection 9-5a) has
been modified significantly with a new explanation, and the numerical examples for basic deficit, interest
cost and total deficit have been changed. Equation (9.9) has been reformulated. Section 9-6, Table 9-1
Annual Rates of Inflation in Selected High Inflation Countries has been updated with more recent
examples and numerical data. The time period has been extended from 1975–2005 to 1975–2008.
In Section 9-7, an historical comparison of the actual rate and natural rate of unemployment for the
United States (as shown in Figure 9-2) has been modified by incorporating new data. The division
of time periods has been changed to 1981–86, 1991–95 and 2002–2005. Now, Figure 9-2 shows the
actual unemployment rate and the natural rate of unemployment over the period 1980–2007 instead of
In Section 9-8, the Subsection 9-8b: “Causes of and Cures for Mismatch Unemployment: Mismatch of
Location” has been eliminated.
Section 9-9 contains a new explanation about turnover unemployment and job search for the year 2005 as
shown in Figure 9-2. Table 9-2 has been updated with new unemployment data by reason, sex, and age,
including the time period July 2007.
The concluding Section 9-10 is unchanged from the concluding section of the 10th edition.
Answers to Questions in Textbook
The misery index is the sum of the inflation and unemployment rates. A criticism is that it weighs
one percentage point of inflation as equal to one percentage point of unemployment, whereas the
costs of one percentage point of inflation and unemployment are unsettled issues and are not likely
to be equal.
A hyperinflation is a very rapid rate of inflation; Gordon defines it as at least 1,000 percent per year.
A moderate (or creeping) inflation, on the other hand, implies a “moderate” rate of inflation,
presumably an inflation rate less than 1,000 percent per year.
Yes, simple percentage changes are misleading as measures of inflation at high rates inflation; in
particular, they overstate the rate of inflation. If inflation is a continuous process (i.e., prices rising
daily or even hourly, as in a hyperinflation), calculating inflation rates at discrete intervals (such as
months, quarters, or years) may be misleading. As Gordon says in Footnote 1, a simple percentage
rate of change at 50 percent per month compounds to an annual rate of 12,875 percent, whereas the
very same implied absolute price increase when compounded continuously produces an inflation
rate of 40.5 percent per month or 487 percent per year. End-of-chapter Problems 1 and 2 also deal
with this issue.