The actual inflation rate is 5%. -The natural rate of unemployment is 3%. 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 SRPC2SRPC2, the short-run Phillips curve that is consistent with these expectations, assuming that it is parallel to SRPC1SRPC1. 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 is (higher than/the same as/lower than) the inflation rate at point A, and the unemployment rate
The following graph plots the long-run
Which of the following is true along SRPC1SRPC1?
-The actual
-The expected inflation rate is 5%.
-The actual inflation rate is 5%.
-The natural rate of unemployment is 3%.
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 SRPC2SRPC2, the short-run Phillips curve that is consistent with these expectations, assuming that it is parallel to SRPC1SRPC1.
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 is (higher than/the same as/lower than) the inflation rate at point A, and the unemployment rate at point C is (higher than/the same as/lower than) the unemployment rate at point A.
Was the central bank able to achieve its goal of lowering inflation?
-No, because the central bank cannot affect the inflation rate through
-Yes, but only in the short run; in the long run, inflation returned to its natural rate.
-Yes, the central bank’s policy successfully reduced inflation in both the short run and the long run.
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