Inflation Rate (П) 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 15.0% 14.0% LRAS 13.0% 12.0% 11.0% 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 Real GDP (Y) AD 10,000 11,000 12,000 13,000 14,000 15,000 16,000 17,000 18,000 19,000 20,000 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. The natural rate of unemployment is 5 percent and Okun's alpha is 8. Finally the central bank comes to its senses (as the U.S. FED did in 1982) and realizes that 8 percent inflation target is way too high. So it decides to reduce the long-term target inflation rate to 2 percent through a drastic contractionary monetary policy. This policy causes the inflation rate to drop to Moreover, a cyclical unemployment of However, in the long run, inflation rate settles at equals percent. percent in the short run. percent emerges in the labor market. percent and the cyclical rate SRAS
Inflation Rate (П) 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 15.0% 14.0% LRAS 13.0% 12.0% 11.0% 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 Real GDP (Y) AD 10,000 11,000 12,000 13,000 14,000 15,000 16,000 17,000 18,000 19,000 20,000 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. The natural rate of unemployment is 5 percent and Okun's alpha is 8. Finally the central bank comes to its senses (as the U.S. FED did in 1982) and realizes that 8 percent inflation target is way too high. So it decides to reduce the long-term target inflation rate to 2 percent through a drastic contractionary monetary policy. This policy causes the inflation rate to drop to Moreover, a cyclical unemployment of However, in the long run, inflation rate settles at equals percent. percent in the short run. percent emerges in the labor market. percent and the cyclical rate SRAS
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter22: Inflation
Section: Chapter Questions
Problem 37P: Rosalie the Retiree knows that when she retires in 16 years, her company will give her a one-time...
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Transcribed Image Text:Inflation Rate (П)
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
15.0%
14.0%
LRAS
13.0%
12.0%
11.0%
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Real GDP (Y)
AD
10,000
11,000
12,000
13,000
14,000
15,000
16,000
17,000
18,000
19,000
20,000
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. The natural rate of unemployment is 5 percent and Okun's alpha is
8.
Finally the central bank comes to its senses (as the U.S. FED did in 1982) and realizes that 8 percent
inflation target is way too high. So it decides to reduce the long-term target inflation rate to 2
percent through a drastic contractionary monetary policy.
This policy causes the inflation rate to drop to
Moreover, a cyclical unemployment of
However, in the long run, inflation rate settles at
equals
percent.
percent in the short run.
percent emerges in the labor market.
percent and the cyclical rate
SRAS
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