The following graph depicts the short-run and long-run Phillips curves (SRPC and LRPC) for a hypothetical economy in long-run macroeconomic equilibrium at point A, where the natural unemployment rate is 6% and the current inflation rate is 8% per year. Suppose that the central bank in this economy is concerned that inflation is too high and wants to lower the inflation rate by 6 percentage points peryear. A reduction in the rate of inflation is known asTo reduce inflation from 8% to 2% in the short run, the central bank wouldhave to accept an unemployment rate ofTrue or False: If people have rational expectations, the sacrifice ratio could be much higher than suggested by the short-run Phillips curve.OOO TrueFalse INFLATION RATE (Percent)2018161412108CD6200125LRPC3 46 7UNEMPLOYMENT RATE (Percent)A8SRPC9 10

Suppose that the central Bank for this economy decided that the inflation is too high and thus wants…

Answered: short-run and long-run Phillips curves…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The following graph depicts the short-run and long-run Phillips curves (SRPC and LRPC) for a hypothetical economy in long-run macroeconomic equilibrium at point A, where the natural unemployment rate is 6% and the current inflation rate is 8% per year.

Suppose that the central bank in this economy is concerned that inflation is too high and wants to lower the inflation rate by 6 percentage points per
year. A reduction in the rate of inflation is known as
To reduce inflation from 8% to 2% in the short run, the central bank would
have to accept an unemployment rate of
True or False: If people have rational expectations, the sacrifice ratio could be much higher than suggested by the short-run Phillips curve.
OO
O True
False

INFLATION RATE (Percent)
20
18
16
14
12
10
8
CD
6
2
0
0
1
2
5
LRPC
3 4
6 7
UNEMPLOYMENT RATE (Percent)
A
8
SRPC
9 10

Definition Definition Relationship between the rate of unemployment and the rate of inflation that shows that the lower the initial rate of unemployment, the greater the rise in wage rate corresponding to a given rise in the rate of unemployment. The Phillips curve assumes that the ratio between prices and nominal wage rates is constant in the short run. Presented graphically, the Phillips curve shows an inverse relationship between the rate of unemployment and the rate of inflation.

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