4. Monetary policy and the Phillips curve The following graph shows the current short-run Phillips curve for a hypothetical economy; the point on the graph shows the initial unemployment ra and inflation rate. Assume that the economy is currently in long-run equilibrium. Suppose the central bank of the hypothetical economy decides to increase the money supply. On the following graph, shift the curve or drag the blue point along the curve, or do both, to show the short-run effects of this policy. Hint: You may assume that the central bank's move was unanticipated. ercent) 6 5 SR Philips Curve

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4. Monetary policy and the Phillips curve
The following graph shows the current short-run Phillips curve for a hypothetical economy; the point on the graph shows the initial unemployment ra
and inflation rate. Assume that the economy is currently in long-run equilibrium.
Suppose the central bank of the hypothetical economy decides to increase the money supply.
On the following graph, shift the curve or drag the blue point along the curve, or do both, to show the short-run effects of this policy.
Hint: You may assume that the central bank's move was unanticipated.
INFLATION RATE (Percent)
0
INFLATION RATE (Percent)
3
N
D
SR Philips Curve
In the short run, an unexpected increase in the money supply results in
unemployment rate.
12
UNEMPLOYMENT RATE (Parcent)
On the following graph, shift the curve or drag the blue point along the
supply.
3
15
12
UNEMPLOYMENT RATE (Percent)
15
15
In the long run, the increase in the money supply results in
(relative to the economy's initial equilibrium).
18
SR Phillips Curve
a decrease
?
in the inflation rate and
in the
an increase th, to show the long-run effects of the increase in the money
no change
in the inflation rate and
in the unemployment rate
Transcribed Image Text:4. Monetary policy and the Phillips curve The following graph shows the current short-run Phillips curve for a hypothetical economy; the point on the graph shows the initial unemployment ra and inflation rate. Assume that the economy is currently in long-run equilibrium. Suppose the central bank of the hypothetical economy decides to increase the money supply. On the following graph, shift the curve or drag the blue point along the curve, or do both, to show the short-run effects of this policy. Hint: You may assume that the central bank's move was unanticipated. INFLATION RATE (Percent) 0 INFLATION RATE (Percent) 3 N D SR Philips Curve In the short run, an unexpected increase in the money supply results in unemployment rate. 12 UNEMPLOYMENT RATE (Parcent) On the following graph, shift the curve or drag the blue point along the supply. 3 15 12 UNEMPLOYMENT RATE (Percent) 15 15 In the long run, the increase in the money supply results in (relative to the economy's initial equilibrium). 18 SR Phillips Curve a decrease ? in the inflation rate and in the an increase th, to show the long-run effects of the increase in the money no change in the inflation rate and in the unemployment rate
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