Page 371 - Krugmans Economics for AP Text Book_Neat

figure 33.3

Cyclical Unemployment and (a) The Actual Unemployment Rate Fluctuates
the Output Gap Around the Natural Rate . . .
Panel (a) shows the actual U.S. unemploy- Unemployment
rate
ment rate from 1949 to 2009, together 12% Actual unemployment rate
with the Congressional Budget Office esti-
mate of the natural rate of unemploy- 10
ment. The actual rate fluctuates around
the natural rate, often for extended peri- 8
ods. Panel (b) shows cyclical unemploy- 6 Section 6 Inflation, Unemployment, and Stabilization Policies
ment—the difference between the actual
unemployment rate and the natural rate 4
of unemployment—and the output gap, 2 Natural rate of unemployment
also estimated by the CBO. The unem-
ployment rate is measured on the left ver-
tical axis, and the output gap is measured 1949 1960 1970 1980 1990 2000 2009
with an inverted scale on the right vertical
Year
axis. With an inverted scale, it moves in
the same direction as the unemployment (b) . . . and These Fluctuations Correspond
rate: when the output gap is positive, the to the Output Gap.
actual unemployment rate is below its Unemployment Output
natural rate; when the output gap is neg- rate Cyclical unemployment gap
ative, the actual unemployment rate is 6% –10%
above its natural rate. The two series Output gap –8
track one another closely, showing the 4 –6
strong relationship between the output –4
gap and cyclical unemployment. 2
–2
Source: Congressional Budget Office; Bureau of
Labor Statistics; Bureau of Economic Analysis. 0 0
2
–2
4
–4 6
1949 1960 1970 1980 1990 2000 2009

Year

Module 33 AP Review

Solutions appear at the back of the book.
Check Your Understanding

1. Suppose there is a large increase in the money supply in an 2. Suppose that all wages and prices in an economy are indexed to
economy that previously had low inflation. As a consequence, inflation. Can there still be an inflation tax?
aggregate output expands in the short run. What does this
say about situations in which the classical model of the price
level applies?

module 33 Types of Inflation, Disinflation, and Deflation 329