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 econom

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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
Transcribed Image Text: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
Transcribed Image Text: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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