In the last half of the 1990s, the usual short-run trade-off between inﬂation and unemployment did not arise because
A) the Fed held interest rates constant.
B) the federal government balanced its budget.
C) the U.S. personal savings rate rose.
D) productivity (and thus aggregate supply) grew faster than previously.

Question

Quizplus · Accepted Answer

The correct choice is D because when productivity and aggregate supply grow faster, there is an increase in output and a decrease in the cost of production, leading to lower prices and higher output levels. This would result in low inflation and low unemployment, breaking the usual short-run trade-off between inflation and unemployment. The other options, such as holding interest rates constant or balancing the budget, may have some impact on inflation and unemployment, but they do not fully explain the absence of the short-run trade-off.

In the Last Half of the 1990s, the Usual Short-Run