PICK 3 AND ANSWER

1. The Case in Point titled “Some Reflections on the 1970s” describes the

changes in inflation and in unemployment in 1970 and 1971 as a

watershed development for macroeconomic thought. Why was an

increase in unemployment such a significant event?

2. As the economy slipped into recession in 1980 and 1981, the Fed was

under enormous pressure to adopt an expansionary monetary policy.

Suppose it had begun an expansionary policy early in 1981. What does

the text’s analysis of the inflation-unemployment cycle suggest about

how the macroeconomic history of the 1980s might have been changed?

3. Here are some news reports covering events of the past 35 years.

In each case, identify the phase (Phillips, stagflation, or recovery)

the economy is in, and suggest what change in aggregate demand

or aggregate supply might have caused it.

a. “President Nixon expressed satisfaction with last year’s

economic performance. He said that with inflation and

unemployment heading down, the nation ‘is on the right

course.’”

b. “The nation’s inflation rate rose to a record high last month,

the government reported yesterday. The consumer price

index jumped 0.3% in January. Coupled with the

announcement earlier this month that unemployment had

risen by 0.5 percentage points, the reports suggested that the

first month of President Nixon’s second term had gotten off

to a rocky start.”

c. “President Carter expressed concern about reports of rising

inflation but insisted the economy is on the right course. He

pointed to recent reductions in unemployment as evidence

that his economic policies are working.”

4. The text notes that changes in oil prices can affect the inflationunemployment

outcome. Explain what effect changes in oil prices may

have on these two variables.

5. The introduction to this chapter suggests that unemployment fell, and

inflation generally fell, through most of the 1990s. What phase (Phillips,

stagflation, or recovery) does this represent? Relative to U.S. experience

from the 1960s until the 1990s, what was unusual about this?

6. Suppose that declining resource supplies reduce potential output in

each period by 4%. What kind of monetary policy would be needed to

maintain a zero rate of inflation at full employment?

Chapter 16 Inflation and Unemployment

16.4 Review and Practice 681

7. The Humphrey–Hawkins Act of 1978 required that the federal

government maintain an unemployment rate of 4% and hold the

inflation rate to less than 3%. What does the inflation-unemployment

relationship tell you about achieving such goals?

8. The American Economic Association publishes a newsletter (which is

available on the AEA’s Internet site at http://www.aeaweb.org/joe/)

called Job Openings for Economists (JOE). Virtually all academic and many

nonacademic positions for which applicants are being sought for

economics positions are listed in the newsletter, which is quite

inexpensive. How do you think that the publication of this journal

affects the unemployment rate among economists? What type of

unemployment does it affect?

9. Many people think that the process of putting computer technology to

work and incorporating computers into the workplace is causing a

massive restructuring of virtually every institution of modern life. If

they are right, what are the implications for unemployment? What kind

of unemployment would be affected?

10. The natural unemployment rate in the United States has varied over the

last 50 years. According to the Congressional Budget Office, the natural

rate was 5.5% in 1960, rose to about 6.5% in the 1970s, and had declined

to about 4.8% by 2000. What do you think might have caused this

variation?

11. Suppose the Fed begins carrying out an expansionary monetary policy

in order to close a recessionary gap. Relate what happens during the

next two phases of the inflation-unemployment cycle to the maxim

“You can fool some of the people some of the time, but you can’t fool all

of the people all of the time.”