New Classical Model with Rational Expectations. People anticipate policy incorrectly with a bias up. There is a rise in the money supply. Explain and diagrammatically represent what happens in the short-run and long-run to P, Y, W, and N. Draw the short-run and long-run Phillips curves consistent with your results

Q: 7. Answer the next 4 multiple choice questions but circling what you believe is correct. A: When…

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Q: 39. Model the Phillips curve and explain what the curve means in terms of policy.

A:

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A:

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Inflation and Purchasing Power Theory

In economic terms, Inflation refers to the increase in the costs of various commodities which are used in daily lifestyle like food, clothes, transport, etc. over a specific time. It may lead to a fall in the purchasing power of the people and also affects the exchange rate of the currency because of the price increase. As the purchasing power falls the unit of the currency in the economy falls. When the prices of the commodities are decreased, then the purchasing power of the consumers will rise, then it will lead to deflation and changes the currency of the base economy to that of the foreign economy which will lead to change in exchange rates.