Step 3: Describe how the growth rate in the real wage rate is calculated.
Extra Solved Problem 16-1The Policy Menu View of the Phillips Curve In 1960, Paul Samuelson and Robert Solow wrote the first article to use the Phillips curve model to explain the relationship between unemployment and inflation in the United States. They concluded that:[P]rice stability is seen to involve about 5 1/2 percent unemployment; whereas…3 percent unemployment is seen to involve a price rise of about 4 1/2 percent per annum. We rather expect that the tug of war of politics will end us up in the next few years somewhere in between these selected points.Source: Paul A. Samuelson and Robert M. Solow, “Analytical Aspects of Anti-Inflation Policy,” American Economic Review,Vol. 50, No. 2 (May 1960), pp. 192–193.What did Samuelson and Solow mean by “price stability”? What does the “tug of war of politics” have to do with what happens to the unemployment and inflation rates?SOLVING THE PROBLEM:Step 1: Review the chapter material.