ABSTRACT
Historically, the prosperity phase of the business cycle has been characterized by rising prices and low levels of unemployment, while falling prices (i.e., deflation), accompanied by high unemployment levels, were associated with periods of depression. Thus, the 1970s experience of increasing rates of wage and price changes and rising rates of unemployment, as exhibited in Table 16.1, confronted economists and policy makers with a totally new problem.) "Stagflation" and "slumpflation," as the phenomena of simultaneous price inflation and unchanged or decreasing levels of employment and output came to be called, were completely contrary to previous experience.2 The necessities for explaining inflationary pressure in economies that have unemployed resources and for formulating appropriate policies to achieve the twin goals of containing inflation while maintaining satisfactory employment levels presents an intellectual puzzle, about which disagreement continues and which, thus far, has defied effective policy action.
