Between 1995 and 2000, the U.S. economy experienced surprisingly rapid growth, termed the new economy by some

Between 1995 and 2000, the U.S. economy experienced surprisingly rapid growth, termed the €œnew economy€ by some observers. Was this a change in potential output or short-run output? Alan Greenspan, Fed chairman, argued it was a change in potential and did not raise interest rates to slow the economy. At the time, many economists thought this was a mistake. Look back at the data on inflation in Figure 12.9 to form your own opinion. Write a brief memo (one page or less) either defending or criticizing Greenspan€™s position. Be sure to use the graphs of the short-run model to make your case.

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FIGURE 12.9 Inflation in the United States Percent 14 12 10 1960 1965 1970 1975 1980 1985 1990 995 2000 2005 2010 Year