Economics: Principles & Policy
Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Chapter 33, Problem 1DQ
To determine

The trade-off between inflation and unemployment in the 1990s.

Expert Solution & Answer
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Explanation of Solution

In the 1990s, an unusual increase in the aggregate supply, a beneficial supply shock, leads to a fall in both inflation and unemployment.  This phenomenon does not contradict the basic trade-off between unemployment and inflation; favorable supply shocks should produce rapid economic growth with falling inflation. 

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