Inflation Rate (n) 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 0 1,000 LRAS 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 3 11,000 12,000 Real GDP (Y) AD This policy causes the inflation rate to drop to SRAS 13,000 14,000 15,000 16,000 17,000 18,000 19,000 20,000 Short Run and Consider the graph above. It is also in the files folder under the name the Long Run. The graph pertains to a hypothetical country. The central bank in this country (also called the Fed) follows an inflation targeting policy. The current target inflation rate in 8 percent. The natural rate of unemployment is 5 percent and Okun's alpha is 8. Finally, the president of the country appoints a new chairperson for the central band and the chair decides to bring the runaway inflation under control (as the U.S. FED did in 1980). The new chair realizes that 8 percent inflation target is way too high. So, s/he decides to reduce the long-term target inflation rate to 2 percent through a drastic contractionary monetary policy. percent in the short run. Moreover, a cyclical unemployment of in the labor market. However, in the long run, inflation rate settles at percent and the cyclical rate equals percent emerges percent.
Inflation Rate (n) 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 0 1,000 LRAS 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 3 11,000 12,000 Real GDP (Y) AD This policy causes the inflation rate to drop to SRAS 13,000 14,000 15,000 16,000 17,000 18,000 19,000 20,000 Short Run and Consider the graph above. It is also in the files folder under the name the Long Run. The graph pertains to a hypothetical country. The central bank in this country (also called the Fed) follows an inflation targeting policy. The current target inflation rate in 8 percent. The natural rate of unemployment is 5 percent and Okun's alpha is 8. Finally, the president of the country appoints a new chairperson for the central band and the chair decides to bring the runaway inflation under control (as the U.S. FED did in 1980). The new chair realizes that 8 percent inflation target is way too high. So, s/he decides to reduce the long-term target inflation rate to 2 percent through a drastic contractionary monetary policy. percent in the short run. Moreover, a cyclical unemployment of in the labor market. However, in the long run, inflation rate settles at percent and the cyclical rate equals percent emerges percent.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Transcribed Image Text:15.0%
14.0%
13.0%
12.0%
11.0%
. 10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Inflation Rate (n)
0
1,000
2,000
3,000
000't
5,000
6,000
000'2
8,000
9,000
000'0
LRAS
3 11,000
12,000
13,000
Real GDP (Y)
This policy causes the inflation rate to drop to
14,000
9
AD
SRAS
15,000
16,000
17,000
18,000
19,000
20,000
Short Run and
Consider the graph above. It is also in the files folder under the name
the Long Run. The graph pertains to a hypothetical country. The central bank in this
country (also called the Fed) follows an inflation targeting policy. The current target
inflation rate in 8 percent. The natural rate of unemployment is 5 percent and Okun's
alpha is 8.
Finally, the president of the country appoints a new chairperson for the central band
and the chair decides to bring the runaway inflation under control (as the U.S. FED did
in 1980). The new chair realizes that 8 percent inflation target is way too high. So,
s/he decides to reduce the long-term target inflation rate to 2 percent through a
drastic contractionary monetary policy.
percent in the
short run. Moreover, a cyclical unemployment of
in the labor market. However, in the long run, inflation rate settles at
percent and the cyclical rate equals
percent emerges
percent.
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