Foundations of Economics, 8th Edition

31.3 Influencing Inflation and Unemployment

MyEconLab Concept Video

How can the Fed influence the inflation rate and the unemployment rate and achieve low levels of both? The basic answer is that the Fed can try to lower the expected inflation rate. When the expected inflation rate is low, as it was in 2000, the tradeoff is more favorable than when the expected inflation rate is high, as it was in 1980.

Influencing the Expected Inflation Rate

The expected inflation rate is the inflation rate that people forecast and use to set the money wage rate and other money prices. To forecast the inflation rate, people use the same basic method that they use to forecast other variables that affect their lives.

Data make up the first ingredient in forecasting—data ...