### Understanding the Phillips Curve and Economic Output#### Graph ExplanationThe provided graph illustrates the Short-Run Phillips Curve (SRPC), depicting the inverse relationship between the unemployment rate (x-axis) and the inflation rate (y-axis). Here's a detailed breakdown of the graph:- **X-Axis (Unemployment Rate in Percent)**: The horizontal axis measures the unemployment rate, ranging from 0% to 18%.- **Y-Axis (Inflation Rate)**: The vertical axis measures the inflation rate.- **SRPC Curve**: The blue line represents the Short-Run Phillips Curve, which slopes downwards, indicating that as the unemployment rate decreases, the inflation rate increases.- **Natural Rate of Unemployment**: There's an orange vertical line at the 9% unemployment rate, suggesting the natural rate of unemployment.#### Questions and Statements**Which of the following statements are true based on these graphs? Check all that apply.**1. The natural level of output is $3 trillion.2. The unemployment rate is currently 9% higher than the natural rate of unemployment.3. The current quantity of output is greater than potential output.**Monetary Policy Impact****Suppose the central bank of the economy decreases the money supply.**_Show the long-run effects of this policy on both of the graphs by shifting the appropriate curves._- **The long-run effect of the central bank's policy is** _______ **in the inflation rate,** _______ **in the unemployment rate, and** _______ **in real GDP.**To answer these queries and make the necessary curve adjustments, students should have a solid understanding of the fundamentals of macroeconomic theory, particularly inflation, unemployment, and the implications of monetary policy adjustments. The following graphs show the state of an economy that is currently in long-run equilibrium. **Graph 1: Aggregate Demand (AD) and Long-Run Aggregate Supply (LRAS) Curves**- This graph visually represents the relationships between the price level and real GDP.- The vertical orange line represents the Long-Run Aggregate Supply (LRAS) curve, which is inelastic in the long run and indicates that the quantity of output is determined by factors such as technology, resources, and institutions rather than the price level.- The downward sloping blue line represents the Aggregate Demand (AD) curve, showing the negative relationship between the price level and the quantity of goods and services demanded.**Graph 2: Long-Run and Short-Run Phillips Curves (LRPC and SRPC)**- This graph shows the relationship between inflation and unemployment.- The vertical orange line labeled LRPC represents the Long-Run Phillips Curve, indicating no trade-off between inflation and unemployment in the long run. According to this curve, the economy gravitates towards the natural rate of unemployment regardless of the inflation rate.- The downward sloping blue line labeled SRPC represents the Short-Run Phillips Curve, which shows the temporary trade-off between inflation and unemployment. As reflected in this curve, reducing unemployment below its natural rate results in a higher rate of inflation.In summary, these graphs illustrate how in the long run, an economy's output is fixed by its long-term supply-side factors, while in the short run, inflation and unemployment exhibit an inverse relationship.

The long run effects of monetary policy: The First graph represents LRAS and AD. In this graph the…

3 6 12 UNEMPLOYMENT RATE (Percent) 9 15 18 ollowing statements are true based on these graphs? Check all that apply. natural level of output is $3 trillion. unemployment rate is currently 9% higher than the natural rate of unemployment. current quantity of output is greater than potential output. central bank of the economy decreases the money supply.

3 6 12 UNEMPLOYMENT RATE (Percent) 9 15 18 ollowing statements are true based on these graphs? Check all that apply. natural level of output is $3 trillion. unemployment rate is currently 9% higher than the natural rate of unemployment. current quantity of output is greater than potential output. central bank of the economy decreases the money supply.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Unemployment and Cost of Unemployment

Unemployment is the state of being unemployed, even when an individual is actively seeking work opportunities. The unemployment rate refers to the percentage of the workforce that is currently unemployed.

Question

### Understanding the Phillips Curve and Economic Output

#### Graph Explanation

The provided graph illustrates the Short-Run Phillips Curve (SRPC), depicting the inverse relationship between the unemployment rate (x-axis) and the inflation rate (y-axis). Here's a detailed breakdown of the graph:

- **X-Axis (Unemployment Rate in Percent)**: The horizontal axis measures the unemployment rate, ranging from 0% to 18%.
- **Y-Axis (Inflation Rate)**: The vertical axis measures the inflation rate.
- **SRPC Curve**: The blue line represents the Short-Run Phillips Curve, which slopes downwards, indicating that as the unemployment rate decreases, the inflation rate increases.
- **Natural Rate of Unemployment**: There's an orange vertical line at the 9% unemployment rate, suggesting the natural rate of unemployment.

#### Questions and Statements

**Which of the following statements are true based on these graphs? Check all that apply.**

1. The natural level of output is $3 trillion.
2. The unemployment rate is currently 9% higher than the natural rate of unemployment.
3. The current quantity of output is greater than potential output.

**Monetary Policy Impact**

**Suppose the central bank of the economy decreases the money supply.**

_Show the long-run effects of this policy on both of the graphs by shifting the appropriate curves._

- **The long-run effect of the central bank's policy is** _______ **in the inflation rate,** _______ **in the unemployment rate, and** _______ **in real GDP.**

To answer these queries and make the necessary curve adjustments, students should have a solid understanding of the fundamentals of macroeconomic theory, particularly inflation, unemployment, and the implications of monetary policy adjustments.

The following graphs show the state of an economy that is currently in long-run equilibrium.

**Graph 1: Aggregate Demand (AD) and Long-Run Aggregate Supply (LRAS) Curves**
- This graph visually represents the relationships between the price level and real GDP.
- The vertical orange line represents the Long-Run Aggregate Supply (LRAS) curve, which is inelastic in the long run and indicates that the quantity of output is determined by factors such as technology, resources, and institutions rather than the price level.
- The downward sloping blue line represents the Aggregate Demand (AD) curve, showing the negative relationship between the price level and the quantity of goods and services demanded.

**Graph 2: Long-Run and Short-Run Phillips Curves (LRPC and SRPC)**
- This graph shows the relationship between inflation and unemployment.
- The vertical orange line labeled LRPC represents the Long-Run Phillips Curve, indicating no trade-off between inflation and unemployment in the long run. According to this curve, the economy gravitates towards the natural rate of unemployment regardless of the inflation rate.
- The downward sloping blue line labeled SRPC represents the Short-Run Phillips Curve, which shows the temporary trade-off between inflation and unemployment. As reflected in this curve, reducing unemployment below its natural rate results in a higher rate of inflation.

In summary, these graphs illustrate how in the long run, an economy's output is fixed by its long-term supply-side factors, while in the short run, inflation and unemployment exhibit an inverse relationship.

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