In the graph you've just made, what is the unemployment rate and the inflation rate if the Fed overstimulates but the expected inflation rate remains at 2 percent? The unemployment rate _______ percent and the inflation rate _______ percent. A. decreases to 4; rises to 3 B. remains at 8; remains at 1 C. decreases to 5; rises to 4 D. decreases to 5; rises to 2
In the graph you've just made, what is the unemployment rate and the inflation rate if the Fed overstimulates but the expected inflation rate remains at 2 percent? The unemployment rate _______ percent and the inflation rate _______ percent. A. decreases to 4; rises to 3 B. remains at 8; remains at 1 C. decreases to 5; rises to 4 D. decreases to 5; rises to 2
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
In the graph you've just made, what is the
A. decreases to 4; rises to 3
B. remains at 8; remains at 1
C. decreases to 5; rises to 4
D. decreases to 5; rises to 2
![**Text:**
- But the Fed might overstimulate and make the unemployment rate fall below the natural unemployment rate and raise the inflation rate above the expected rate, like the graph now shows.
- If too much monetary stimulus raises the expected inflation rate, the short-run Phillips curve shifts upward and the economy moves to point C.
[Reset Button]
---
**Graph Explanation:**
The graph illustrates the relationship between inflation rate and unemployment rate, shown with different curves and points.
- **Axes:**
- The x-axis represents the unemployment rate (percent per year), ranging from 0 to 10%.
- The y-axis represents the inflation rate (percent per year), ranging from 0 to 6%.
- **Curves:**
- **LRPC (Long-Run Phillips Curve):** A vertical red line representing the natural unemployment rate, located at around 5% unemployment.
- **SRPC₀ (Short-Run Phillips Curve 0):** A blue curve showing the initial relationship between inflation and unemployment.
- **SRPC₁ (Short-Run Phillips Curve 1):** A second blue curve that has shifted upwards, reflecting an increase in expected inflation.
- **Points:**
- **Point A:** Located on SRPC₀, with an inflation rate of about 2% and an unemployment rate of around 5%.
- **Point B:** At the intersection of LRPC and SRPC₀, indicating a situation where the economy is at the natural rate of unemployment.
- **Point C:** Illustrates the effect of overstimulation, where both the expected inflation rate and actual inflation have risen, with unemployment falling below the natural rate.
- **Annotations:**
- A horizontal line at 4% inflation signifies the increase in the expected inflation rate.
- An arrow pointing from SRPC₀ to SRPC₁ indicates the shift in the short-run Phillips curve due to increased expected inflation.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F18b51b64-0111-4374-972d-fb814ff25238%2F09f10587-28e0-4ee9-a436-765300ae2254%2F8uyff9_processed.png&w=3840&q=75)
Transcribed Image Text:**Text:**
- But the Fed might overstimulate and make the unemployment rate fall below the natural unemployment rate and raise the inflation rate above the expected rate, like the graph now shows.
- If too much monetary stimulus raises the expected inflation rate, the short-run Phillips curve shifts upward and the economy moves to point C.
[Reset Button]
---
**Graph Explanation:**
The graph illustrates the relationship between inflation rate and unemployment rate, shown with different curves and points.
- **Axes:**
- The x-axis represents the unemployment rate (percent per year), ranging from 0 to 10%.
- The y-axis represents the inflation rate (percent per year), ranging from 0 to 6%.
- **Curves:**
- **LRPC (Long-Run Phillips Curve):** A vertical red line representing the natural unemployment rate, located at around 5% unemployment.
- **SRPC₀ (Short-Run Phillips Curve 0):** A blue curve showing the initial relationship between inflation and unemployment.
- **SRPC₁ (Short-Run Phillips Curve 1):** A second blue curve that has shifted upwards, reflecting an increase in expected inflation.
- **Points:**
- **Point A:** Located on SRPC₀, with an inflation rate of about 2% and an unemployment rate of around 5%.
- **Point B:** At the intersection of LRPC and SRPC₀, indicating a situation where the economy is at the natural rate of unemployment.
- **Point C:** Illustrates the effect of overstimulation, where both the expected inflation rate and actual inflation have risen, with unemployment falling below the natural rate.
- **Annotations:**
- A horizontal line at 4% inflation signifies the increase in the expected inflation rate.
- An arrow pointing from SRPC₀ to SRPC₁ indicates the shift in the short-run Phillips curve due to increased expected inflation.
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