ABSTRACT
Unemployment and inflation are the most important macroeconomic variables that non-economists care about; they affect people directly and significantly. And since voters hold their government accountable for economic performance, they are also of great consequence for politicians. In this chapter, we review the psychology of inflation and unemployment. We illustrate how the complexities of the issues, coupled with the constraints of working and long-term memory, conspire to shape people’s (mis)understanding in these domains. With regards to unemployment, we show how people come up with only the most obvious and direct solutions (“make work” policies), and review studies showing the remarkable lack of breadth and depth in their mental models of how it is produced. Perceptions and expectations of inflation are especially important as they feed into the inflation-generating process itself. Inflation is considered by people to be a prime symptom of economic crisis, though persistent inflation tends to become the normal state in an economy. We show how people’s mental models of inflation narrowly reflect their own particular economic needs and circumstances: scarcely any factors come up in people’s mental maps which do not immediately impinge on their lives.
