Page 741 - The Principle of Economics

THE SHORT-RUN TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT
Two closely watched indicators of economic performance are inflation and unem- ployment. When the Bureau of Labor Statistics releases data on these variables each month, policymakers are eager to hear the news. Some commentators have added together the inflation rate and the unemployment rate to produce a misery index, which purports to measure the health of the economy.
How are these two measures of economic performance related to each other? Earlier in the book we discussed the long-run determinants of unemployment and the long-run determinants of inflation. We saw that the natural rate of unemploy- ment depends on various features of the labor market, such as minimum-wage laws, the market power of unions, the role of efficiency wages, and the effective- ness of job search. By contrast, the inflation rate depends primarily on growth in
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IN THIS CHAPTER YOU WILL . . .
Learn why policymakers face a short-run tradeoff between inflation and unemployment
Consider why
the inflation– unemployment tradeoff disappears in the long run
See how supply shocks can shift the inflation– unemployment tradeoff
Consider the short- run cost of reducing the rate of inflation
See how policymakers’ credibility might affect the cost of reducing inflation