Question

The following table provides data from the United States on the average annual rates of unemployment and inflation. Use the numbers to construct a scatter plot. Discuss why, in the short run, the unemployment rate rises when inflation falls.

Year

Unemployment rate (%)

Inflation rate (%)

Is how the chart is laid out

2003

6

2.3

  

2004

5.5

2.7

  

2005

5.1

3.4

2006

4.6

3.2

  

2007

4.6

2.9

  

2008

5.8

3.8

  

2009

9.3

-0.4

  

2010

9.6

1.6

  

2011

8.9

3.1

2012

8.1

2.1

  

2013

7.4

1.5

Answer 1

Year	Unemployment rate (%)	Inflation rate (%)
2003	6	2.3
2004	5.5	2.7
2005	5.1	3.4
2006	4.6	3.2
2007	4.6	2.9
2008	5.8	3.8
2009	9.3	-0.4
2010	9.6	1.6
2011	8.9	3.1

In short run inflation and unemployment are inversely correlated, Expansionary efforts to decrease unemployment below natural rate of unemployment leads to inflation as people would have more money in hand and supply cannot be increased in shortrun, which increase the demand for goods and hence increase in price levels.