Chapter 31, Problem 10P

To determine

Concept Introduction:

Unemployment rate: It is defined as the rate of unemployed people in an economy. All those people who are willing to work at given wages but cannot find jobs are known as the unemployed. It is the ratio of unemployed to that of labor force in the economy.

Inflation: When the price of any good increases continuously for an interval of time it is called inflation.

Phillips Curve: the curve which shows how change in inflation is related to unemployment rate. According to Phillips when there is increase in unemployment level then the inflation rate decreases.

Natural rate of unemployment: It is the rate of unemployment when real rate of output is equal to the potential output in the economy. At such point the economy does not have recessionary gap or inflationary gap.

Supply Shock: In every economy it is a type of sudden event that leads to change in the supply of output for short period of time. Supply may decrease or increase depending upon the type of shock.

Negative Supply Shock: it is a type of shock in which aggregate supply in an economy degrades.

Disinflation: The act of reducing inflation is known as disinflation. It has huge cost on an economy as it creates huge unemployment and lowers real GDP.