Suppose that the central bank for this economy suddenly and unexpectedly decreases the money supply in an effort to reduce inflation. As a result ofthis unanticipated policy action, actual inflation falls to 3%.On the previous graph, use the black point (plus symbol labeled "B") to illustrate the short-run effects of this policy.Suppose that now, after a period of 3% inflation, households and firms begin to expect that the inflation rate will persist at the level of 3%.On the previous graph, use the purple line (diamond symbol) to draw SRPC₂, the short-run Phillips curve that is consistent with these expectations,assuming that it is parallel to SRPC₂-Finally, using the orange point (square symbol labeled "C"), indicate on the previous graph the new, long-run equilibrium for this economy.The inflation rate at point C isunemployment rate at point A.the inflation rate at point A, and the unemployment rate at point C isWas the central bank able to achieve its goal of lowering inflation?O Yes, the central bank's policy successfully reduced inflation in both the short run and the long run.O Yes, but only in the short run; in the long run, inflation returned to its natural rate.O No, because the central bank cannot affect the inflation rate through monetary policy.theNow, suppose that the public fully anticipates the central bank's decision to decrease the money supply. Assume the public also believes that themonetary authority is firmly committed to carrying out this policy. According to rational expectations theory, when the economy is in long-runequilibrium, a fully anticipated decrease in the money supply will cause the economy to moveprevious Phillips curve graph. In this case, rational expectations theory predicts that the fully anticipated decrease in the money supply will have theimmediate effect ofin the inflation rate andin the unemployment rate.on the The following graph plots the long-run Phillips curve (LRPC) and short-run Phillips curve (SRPC₁) for an economy currently experiencing long-runequilibrium at point A (grey star symbol).INFLATION RATE (Percent)76100SRPC12356UNEMPLOYMENT RATE (Percent)LRPC4Which of the following is true along SRPC₁?O The natural rate of unemployment is 3%.O The expected inflation rate is 5%.O The actual unemployment rate is 6%.O The actual inflation rate is 5%.78+00SRPC₂DC

The statement that is true about SRPC is that the expected inflation rate is 5%.Therefore, the…

Suppose that the central bank for this economy suddenly and unexpectedly decreases the money supply in an effort to reduce inflation. As a result of this unanticipated policy action, actual inflation falls to 3%. On the previous graph, use the black point (plus symbol labeled "B") to illustrate the short-run effects of this policy. Suppose that now, after a period of 3% inflation, households and firms begin to expect that the inflation rate will persist at the level of 3%. On the previous graph, use the purple line (diamond symbol) to draw SRPC₂, the short-run Phillips curve that is consistent with these expectations, assuming that it is parallel to SRPC₂- Finally, using the orange point (square symbol labeled "C"), indicate on the previous graph the new, long-run equilibrium for this economy. The inflation rate at point Cis unemployment rate at point A. the inflation rate at point A, and the unemployment rate at point Cis Was the central bank able to achieve its goal of lowering inflation? the

Suppose that the central bank for this economy suddenly and unexpectedly decreases the money supply in an effort to reduce inflation. As a result of this unanticipated policy action, actual inflation falls to 3%. On the previous graph, use the black point (plus symbol labeled "B") to illustrate the short-run effects of this policy. Suppose that now, after a period of 3% inflation, households and firms begin to expect that the inflation rate will persist at the level of 3%. On the previous graph, use the purple line (diamond symbol) to draw SRPC₂, the short-run Phillips curve that is consistent with these expectations, assuming that it is parallel to SRPC₂- Finally, using the orange point (square symbol labeled "C"), indicate on the previous graph the new, long-run equilibrium for this economy. The inflation rate at point Cis unemployment rate at point A. the inflation rate at point A, and the unemployment rate at point Cis Was the central bank able to achieve its goal of lowering inflation? the

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Gg.13.
Hh.111.