1. The inflation-unemployment relationship The following graph shows the combina

Question

1. The inflation-unemployment relationship

The following graph shows the combinations of unemployment and inflation that existed in the United States from 1961 through 1969.

Hint: Use the graph to answer the following questions. Click on any blue point (circle symbol) on the graph to get its exact coordinates.

What happened to the inflation rate between 1962 and 1965?

The points on the graph represent observations along the U.S. economy's Phillips curve during the 1960s.

Use the black point (cross symbol) to help you answer the questions that follow. (Note: You will not be graded for any adjustments made to the graph.)

If the inflation rate had been 3.5% during the 1960s, the unemployment rate would most likely have been:

Based on the graph, to reduce the inflation rate from 4.3% to 1.5%, the unemployment rate should ( increase/decrase ) by ________ percentage points.

Explanation / Answer

(1) Inflation rate increased by 0.85% (Approximately from 1.1% in 1962 to 1.95% in 1965).

(2) 3.7%

When inflation was 3.5% during 1967-68, unemployment rate was bout 3.7%

(3) Increase by 1.6%

When inflation = 4.3%, unemployment = 3.6%

When inflation = 1.5%, unemployment = 5.2%

Increase in unemployment = (5.2 - 3.6)% = 1.6%

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