If the government uses contractionary monetary policy to reduce inflation from 9 to 6 percent. If people haveadaptive expectations, thanInflation rate (%)1210986404Long run Phillips curveNatural rate5EShort run Phillips curve9Unemployment rate (%)Unemployment will rise to 8 percent in the short run.The natural rate will permanently increase to 8 percentThe economy will remain stuck at point E1.Unemployment will remain at 6 percent as the inflation rate falls.

The contractionary monetary policy decreases money movement in the economy. The inflation rate gets…

If the government uses contractionary monetary policy to reduce inflation from 9 to 6 percent. If people have adaptive expectations, than Inflation rate (%) 12 10 9 8 6 4 0 Natural rate 4 Long run Phillips curve 5 Short run Phillips curve 9 8 Unemployment rate (%) Unemployment will rise to 8 percent in the short run. The natural rate will permanently increase to 8 percent The economy will remain stuck at point E1. Unemployment will remain at 6 percent as the inflation rate falls.

If the government uses contractionary monetary policy to reduce inflation from 9 to 6 percent. If people have adaptive expectations, than Inflation rate (%) 12 10 9 8 6 4 0 Natural rate 4 Long run Phillips curve 5 Short run Phillips curve 9 8 Unemployment rate (%) Unemployment will rise to 8 percent in the short run. The natural rate will permanently increase to 8 percent The economy will remain stuck at point E1. Unemployment will remain at 6 percent as the inflation rate falls.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Figure 17-5 Inflation rate (percent per year) 10% 5 0 Long-run Phillips curve 5.5% 7.5 Short-run Phillips curve Unemployment rate (percent)
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