Chapter 35

I would give this chapter a 1.5 out of 3. This chapter covers a topic that we briefly talked about in chapter one: The trade off between inflation and unemployment. The two have a negative correlation as shown by the Phillips curve. As one rises the other will fall. This interaction is very important in the short run. Policy makers have an array of options to influence inflation and can thus approximately choose where along the curve they want to lie albeit only in the short run. The long run Phillips curve is vertical and thus the inflation rate won't deviate the unemployment rate in the long run according to classical economic thinking. Because of expected inflation the nominal wages and employment rate can adjust. The sacrifice ratio, or the amount of output that falls to reduce inflation by 1% is said to normally be around 5%.