Consider the graph above. It is also in the files folder under the name Short Run and the Long Run. The graph pertains to a hypothetical country. Marginal propensity in this country is MPC = 0.75. The central bank in this country (also called the Fed) follows an inflation targeting policy. The current target inflation rate in 8 percent (1 know, it is too high. We will deal with this problem later after appointing a new chairperson for the Fed). The natural rate of unemployment is 5 percent and Okun's alpha is 8. Suppose that consumer confidence in the economy declines and as a result consumption decreases by 750 units. This causes the AD function to shift to the left by 3000.00 reduction in demand causes the inflation rate to slow down to 7.00 percent in the short run. In the short-run, the real GDP decreases to 8000.00 unemployment increases to an overall unemployment rate of units. This units. Cyclical percent resulting in percent. If the Fed does not take any action and the recession turns out to be long-lived, the inflation rate will change over time and will equal percent in the long run.

Consider the graph above. It is also in the files folder under the name Short Run and the Long Run. The graph pertains to a hypothetical country. Marginal propensity in this country is MPC = 0.75. The central bank in this country (also called the Fed) follows an inflation targeting policy. The current target inflation rate in 8 percent (1 know, it is too high. We will deal with this problem later after appointing a new chairperson for the Fed). The natural rate of unemployment is 5 percent and Okun's alpha is 8. Suppose that consumer confidence in the economy declines and as a result consumption decreases by 750 units. This causes the AD function to shift to the left by 3000.00 reduction in demand causes the inflation rate to slow down to 7.00 percent in the short run. In the short-run, the real GDP decreases to 8000.00 unemployment increases to an overall unemployment rate of units. This units. Cyclical percent resulting in percent. If the Fed does not take any action and the recession turns out to be long-lived, the inflation rate will change over time and will equal percent in the long run.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose the economy is currently in equilibrium, with unemployment equal to the natural rate, and that people form expectations rationally. If the Federal Reserve announces that it is going to decrease the money supply, then: the economy will move to a lower price level but remain at potential GDP. the economy will permanently move to a higher level of output and a higher price level. the economy will permanently move to a lower level of output and a lower price level. the economy will move to a higher GDP level but remain at a constant price level.
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