Second if the inflation rate is mismeasured see the

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Economics: Private and Public Choice
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Chapter 13 / Exercise 12
Economics: Private and Public Choice
Gwartney/Stroup/Sobel/Macpherson
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Second, if the inflation rate is mismeasured (see the discussion of the bias in the CPI in chapter 2), that should affect the Fed’s target. If the CPI inflation rate is overstated by 1 to 2 percentage points per year, then a true target of zero inflation corresponds to measured inflation of 1 to 2 percent.
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Economics: Private and Public Choice
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Chapter 13 / Exercise 12
Economics: Private and Public Choice
Gwartney/Stroup/Sobel/Macpherson
Expert Verified
272 Abel/Bernanke/Croushore • Macroeconomics, Sixth Edition Third, what are the costs and benefits of reducing inflation? Is achieving lower inflation worth the costs? ,
Answers to Textbook Problems Review Questions 1. The Phillips curve is an empirical negative relationship between inflation and unemployment. The Phillips curve relationship held for U.S. data in the 1960s, but broke down in the 1970s and 1980s. 2. In the traditional Phillips curve, inflation itself is related to the unemployment rate. In the expectations-augmented Phillips curve, it is unanticipated inflation (the difference between actual and expected inflation) that is related to cyclical unemployment (the difference between the unemployment rate and the natural rate of unemployment). The traditional Phillips curve appears in the data at times when both expected inflation and the natural rate of unemployment are fixed. 3. In the early 1960s the rate of inflation was fairly low (about 1% to 2%), and it didn’t vary much from year to year. But supply shocks hit the economy in both the mid- and the late-1970s, causing a rise in expected inflation and an upward shift in the Phillips curve. Expansionary monetary and fiscal policies kept inflation high in the 1970s until the Federal Reserve began pursuing contractionary monetary policy to reduce inflation during 1979–1982. This moved the economy to a lower Phillips

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