Chapter 16, Problem 11P

To determine

Concept Introduction:

Unemployment Rate: It is defined as the rate of unemployed people in an economy. All those people who are willing to work at the given wages but cannot find the job are known as unemployed. It is the ratio of the unemployed to that of the labor force in an economy

Inflation: When the price of any good increases continuously for an interval of time it is called inflation.

Phillips Curve: The curve which shows how a change in inflation is related to the unemployment rate. According to Phillips, when there is an increase in the unemployment level, then the inflation rate decreases.

Natural Rate of Unemployment: It is a rate of unemployment when the real rate of output is equal to the potential output in the economy. At such a point the economy does not have a recessionary or inflationary gap.

Supply Shock: In every economy, it is a type of sudden event that leads to a change in the supply of output for a short period of time. Supply may decrease or increase depending upon the type of shock.

Negative Supply Shock: It is a type of shock in which the aggregate supply in an economy degrades.

Disinflation: The act of reducing inflation is known as disinflation. It has a huge cost on an economy as it creates a huge unemployment and lowers the real GDP.