Curiosity 10.2: What Are the Discount and Federal Funds Rates?

		Upon completion of this chapter you should

		know the distinction between the short- and long-run Phillips curves, as well as the implication this distinction has for a trade-off between inflation and unemployment;

		understand the rationale behind wage-price controls as a policy to deal with stagflation; and

		be able to explain how stagflation can come about.

		12.1 The Phillips Curve

		The modem interpretation of the Phillips curve rests heavily on the concept of the natural rate of unemployment, described in chapter 3. This rate, currently thought to be about 4.5 percent in the United Stales, is determined by the amount of frictional and structural unemployment, as well as by institutional phenomena such as minimum-wage legislation and unemployment-insurance programs. It is the "full employment" rate of unemployment to which the forces of supply and demand push the economy in the long run.

		Figure 12.1 The Phillips Curve The Phillips curve shifted upward from the 1960-70 period to the 1975-85 period. Source:  Economic Report of the President, 1990. www.access.gpo.gov/eop/