6. Expectations and the Phillips curve The following graph plots the long-run Phillips curve (LRPC) and short-run Phillips curve (SRPC1) for an economy currently experiencing long-run equilibrium at point A (grey star symbol). SRPC LRPC 7 1 INFLATION RATE (Percent) N 1 5 6 UNEMPLOYMENT RATE (Percent) 0 0 1 2 3 + m SRPC2 C Which of the following is true along SRPC₁? The actual unemployment rate is 6%. The expected inflation rate is 5%. The actual inflation rate is 5%. The natural rate of unemployment is 3%. Suppose that the central bank for this economy suddenly and unexpectedly decreases the money supply in an effort to reduce inflation. As a result of this unanticipated policy action, actual inflation falls to 3%. On the previous graph, use the black point (plus symbol labeled "B") to illustrate the short-run effects of this policy. Suppose that now, after a period of 3% inflation, households and firms begin to expect that the inflation rate will persist at the level of 3%. On the previous graph, use the purple line (diamond symbol) to draw SRPC, the short-run Phillips curve that is consistent with these expectations, assuming that it is parallel to SRPC). Finally, using the orange point (square symbol labeled "C"), indicate on the previous graph the new, long-run equilibrium for this economy. The inflation rate at point C is unemployment rate at point A. the inflation rate at point A, and the unemployment rate at point C is the
6. Expectations and the Phillips curve The following graph plots the long-run Phillips curve (LRPC) and short-run Phillips curve (SRPC1) for an economy currently experiencing long-run equilibrium at point A (grey star symbol). SRPC LRPC 7 1 INFLATION RATE (Percent) N 1 5 6 UNEMPLOYMENT RATE (Percent) 0 0 1 2 3 + m SRPC2 C Which of the following is true along SRPC₁? The actual unemployment rate is 6%. The expected inflation rate is 5%. The actual inflation rate is 5%. The natural rate of unemployment is 3%. Suppose that the central bank for this economy suddenly and unexpectedly decreases the money supply in an effort to reduce inflation. As a result of this unanticipated policy action, actual inflation falls to 3%. On the previous graph, use the black point (plus symbol labeled "B") to illustrate the short-run effects of this policy. Suppose that now, after a period of 3% inflation, households and firms begin to expect that the inflation rate will persist at the level of 3%. On the previous graph, use the purple line (diamond symbol) to draw SRPC, the short-run Phillips curve that is consistent with these expectations, assuming that it is parallel to SRPC). Finally, using the orange point (square symbol labeled "C"), indicate on the previous graph the new, long-run equilibrium for this economy. The inflation rate at point C is unemployment rate at point A. the inflation rate at point A, and the unemployment rate at point C is the
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Transcribed Image Text:6. Expectations and the Phillips curve
The following graph plots the long-run Phillips curve (LRPC) and short-run Phillips curve (SRPC1) for an economy currently experiencing long-run
equilibrium at point A (grey star symbol).
SRPC
LRPC
7
1
INFLATION RATE (Percent)
N
1
5
6
UNEMPLOYMENT RATE (Percent)
0
0
1
2
3
+
m
SRPC2
C
Transcribed Image Text:Which of the following is true along SRPC₁?
The actual unemployment rate is 6%.
The expected inflation rate is 5%.
The actual inflation rate is 5%.
The natural rate of unemployment is 3%.
Suppose that the central bank for this economy suddenly and unexpectedly decreases the money supply in an effort to reduce inflation. As a result of
this unanticipated policy action, actual inflation falls to 3%.
On the previous graph, use the black point (plus symbol labeled "B") to illustrate the short-run effects of this policy.
Suppose that now, after a period of 3% inflation, households and firms begin to expect that the inflation rate will persist at the level of 3%.
On the previous graph, use the purple line (diamond symbol) to draw SRPC, the short-run Phillips curve that is consistent with these expectations,
assuming that it is parallel to SRPC).
Finally, using the orange point (square symbol labeled "C"), indicate on the previous graph the new, long-run equilibrium for this economy.
The inflation rate at point C is
unemployment rate at point A.
the inflation rate at point A, and the unemployment rate at point C is
the
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