Abstract
This chapter discusses unemployment, inflation, and the limits of macro policy. The relative effectiveness of monetary and fiscal policies was a focal point of the monetarist–Keynesian debate. A consensus has emerged from the controversy. Most economists, monetarists, and Keynesians believe that the monetary policy and fiscal policy have an impact on economic activity. Minor differences about the transmission of macro policy remain. Keynesians believe that the effect of monetary policy is transmitted through the interest rate, whereas monetarists consider the link to be direct. In the short run, macro acceleration reduces the rate of unemployment, although upward pressure on prices develops. A lower rate of unemployment can be attained at the expense of a higher rate of inflation. This short-run negative relationship between the rates of unemployment and inflation is called the Phillips curve. With time, if an inflationary course is pursued, decision makers would expect a higher rate of inflation. There is no evidence that inflationist policies can reduce the normal rate of unemployment. Macro deceleration affects output and employment.
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