After you have studied Economics in the News on pp. 762–763, answer the following questions.

a. Why is there no consensus among economists about the likelihood of a sustained high inflation?

b. Why do some economists worry that government stimulus will bring inflation?

c. What happened to U.S inflation in the 1970s that alarms some economists?

d. Use the AS-AD model and the Phillips curve to explain why inflation has remained so low when unemployment has also been low.

e. Use the AS-AD model and the Phillips curve to show why inflation is an expectations game.

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In the pandemic year from March 2020 to March 2021, the U.S. inflation rate averaged 1.2 percent per year. But the inflation rate jumped to 4.2 percent in April, 4.9 percent in May, and 5.6 percent in June. Was this rise in the inflation rate a short-term blip or the start of a sustained and higher inflation? There was no consensus among economists about the answer, but some worried that government stimulus would bring inflation. The stimulus was large. The quantity of money had grown by 24 percent and a monthly government budget deficit of $277 billion had accumulated an increase in govern- ment debt of $3.9 trillion. Inflation rate (percent per year) 10.0 8.0 6.0 4.0 2.0 0 The 1960s Phillips curve 2 The 1970s inflation explosion 69 68 67 166 65 73 70 74 89 79 72 88 78 R 71 87 64 6063 62 85 80 81 86 61 76 84 75 82 83 4 8 10 Unemployment rate (percentage of labor force)