Fundamentals of Economics. Доловова Н.Н - 37 стр.

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37
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the low inflation of the 1990s has been associated with slow growth in the quantity of
money.
Principle #10: Society Faces a Short-Run Tradeoff between
Inflation and Unemployment
If inflation is so easy to explain, why do policymakers sometimes have trouble
ridding the economy of it? One reason is that reducing inflation is often thought to
cause a temporary rise in unemployment. This tradeoff between inflation and
unemployment is called the Phillips curve, after the economist who first examined
this relationship. The Phillips curve remains a controversial topic among economists,
but most economists today accept the idea that there is a short-run tradeoff between
inflation and unemployment. According to a common explanation, this tradeoff arises
because some prices are slow to adjust. Suppose, for example, that the government
reduces the quantity of money in the economy. In the long run, the only res ult of this
policy change will be a fall in the overall level of prices. Yet not all prices will adjust
immediately. It may take several years before all firms issue new catalogs, all unions
make wage concessions, and all restaurants print new menus. That is, prices are said
to be sticky in the short run.
Because prices are sticky, various types of government policy have short-run
effects that differ from their long-run effects. When the government reduces the
quantity of money, for instance, it reduces the amount that people spend. Lower
spending, together with prices that are stuck too high, reduces the quantity of goods
and services that firms sell. Lower sales, in turn, cause firms to lay off workers. Thus,
the reduction in the quantity of money raises unemployment temporarily until prices
have fully adjusted to the change.
The tradeoff between inflation and unemployment is only temporary, but it can
last for several years. The Phillips curve is, therefore, crucial for understanding many
developments in the economy. In particular, policymakers can exploit this tradeoff
using various policy instruments. By changing the amount that the government
spends, the amount it taxes, and the amount of money it prints, policymakers can, in
the short run, influence the combination of inflation and unemployment that the
economy experiences. Because these instruments of monetary and fiscal policy are
potentially so powerful, how policymakers should use these instruments to control
the economy, if at all, is a subject of continuing debate.
Ke y conce pts
inflation - an increase in the overall level of prices in
the economy
Phillips curve – the short-run tradeoff between inflation and
unemployment

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