The following figure depicts the Phillips curve and the indifference curves of an eco- nomy. This economy has an independent central bank with an inflation target of 2%. Consider an aggregate demand shock that increases unemployment. Explain why the central bank would cut the interest rate to put upward pressure on inflation, in order to bring it back to the target rate.

The following figure depicts the Phillips curve and the indifference curves of an eco- nomy. This economy has an independent central bank with an inflation target of 2%. Consider an aggregate demand shock that increases unemployment. Explain why the central bank would cut the interest rate to put upward pressure on inflation, in order to bring it back to the target rate.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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