Answered: Before Phelps’s work, the prevailing…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Before Phelps’s work, the prevailing view was that economic policy makers faced a tradeoff between unemployment and inflation: Policies that reduced unemployment would increase inflation, and policies that reduced inflation would increase unemployment.

This relationship between inflation and unemployment seemed to be supported by the data. For example, the following table shows the unemployment rate and inflation rate for the United States from 1961 to 1969. The inflation rate is measured by the percentage change in the GDP deflator.

On the following graph, plot the black points (cross symbol) to show the combinations of unemployment and inflation that existed from 1961 through 1969. Plot the points in order, starting with 1961 and ending with 1969. (Hint: When you're done, place your cursor over each of the points you plotted to ensure that you've placed them on the exact coordinates you intended to.)

Based on data in the table, when the inflation rate increased from 4.6% to 5.8%, what happened to the unemployment rate?

-The unemployment rate decreased by 0.1 of a percentage point.

-The unemployment rate decreased by 1 percentage point.

-The unemployment rate increased from 3.8% to 4.5%.

-The unemployment rate decreased by 2 percentage points.

On the following graph, plot the black points (cross symbol) to show the combinations of unemployment and inflation that existed from 1961 through
1969. Plot the points in order, starting with 1961 and ending with 1969. (Hint: When you're done, place your cursor over each of the points you
plotted to ensure that you've placed them on the exact coordinates you intended to.)
INFLATION RATE (Percent per year)
7
6
LO
2
1
0
0
1
4
5
UNEMPLOYMENT RATE (PERCENT)
2
3
6
7
+
(?)

Year
1961
1962
1963
1964
1965
1966
1967
1968
1969
Inflation Rate Unemployment Rate
(Percent)
6.7
5.5
5.7
5.2
4.5
3.8
3.8
3.6
3.5
(Percent)
1.1
1.4
1.3
1.5
1.4
2.4
3.5
4.6
5.8

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