1. Monetary policy and the Phillips curveThe following graph shows the current short-run Phillips curve for a hypothetical economy; the point on the graph shows the initial unemployment rate and inflation rate. Assume that the economy is currently in long-run equilibrium.Suppose the central bank of the hypothetical economy decides to decrease the money supply. INFLATION RATE (Percent)65001ISR Phillips Curve342UNEMPLOYMENT RATE (Percent)56In the short run, an unexpected decrease in the money supply results inunemployment rate.SR Phillips Curvein the inflation rate andin the INFLATION RATE (Percent)60012UNEMPLOYMENT RATE (Percent)345In the long run, the decrease in the money supply results in(relative to the economy's initial equilibrium).6(?)in the inflation rate and▼in the unemployment rate

The graphs above demonstrate the Phillips curve, a concept in economics that asserts that…

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ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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1. Monetary policy and the Phillips curve

The following graph shows the current short-run Phillips curve for a hypothetical economy; the point on the graph shows the initial unemployment rate and inflation rate. Assume that the economy is currently in long-run equilibrium.

Suppose the central bank of the hypothetical economy decides to decrease the money supply.

INFLATION RATE (Percent)
6
5
0
0
1
I
SR Phillips Curve
3
4
2
UNEMPLOYMENT RATE (Percent)
5
6
In the short run, an unexpected decrease in the money supply results in
unemployment rate.
SR Phillips Curve
in the inflation rate and
in the

INFLATION RATE (Percent)
6
0
0
1
2
UNEMPLOYMENT RATE (Percent)
3
4
5
In the long run, the decrease in the money supply results in
(relative to the economy's initial equilibrium).
6
(?)
in the inflation rate and
▼in the unemployment rate

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