The following graph illustrates long-run and short-run Phillips curves for an economy that is currently at point A.Long-Run Phillips CurveSRPC,SRPCSRPCUnemplayment RateTo reduce inflation, the Fed uses contractionarypolicy. In the short run, the economy moves from point A to point EIn the long run, theeconomy will move to pointThis illustrates that the benefits v of reducing inflation are temporary and the costsof reducing inflation are permanent.Inflation Rate

Phillips curve is the graphical representation of the relationship between unemployment and…

Answered: The following graph illustrates…

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 Fed is fighting recession and it happens to overstimulate the economy. If the expected inflation rate rises above the 2 percent goal, what is the cost of returning the inflation rate back to its goal? The cost of returning the inflation rate back to its goal is _______. A. an inflationary gap and an even higher inflation rate than initially B. unemployment below the natural unemployment rate C. a decrease in potential GDP and aggregate supply D. a recessionary gap and a higher unemployment rate
If the government uses contractionary monetary policy to reduce inflation from 9 to 6 percent. If people have adaptive expectations, than Inflation rate (%) 12 10 9 8 6 4 0 4 Long run Phillips curve Natural rate 5 E Short run Phillips curve 9 Unemployment rate (%) Unemployment will rise to 8 percent in the short run. The natural rate will permanently increase to 8 percent The economy will remain stuck at point E1. Unemployment will remain at 6 percent as the inflation rate falls.
In this Decision Point you learned a little about inflation and inflation expectations. Apply what you learned from this decision point to the following questions. Erica makes $25 per hour. Erica receives a 1.9%1.9% raise and inflation is 2.5%2.5% what happens to her real wage? Her real wage: rises by 1.9%1.9% rises by 2.5%2.5% falls by 0.6%0.6%. does not change.
3. A nation consists of 2 political parties, Democrats and Republicans. The Democrats care more about unemployment than Republicans, and Repuhlicans care more about inflation than Democrats. When Democrats hold power, they choose an inflation rate, tp and when the Republicans hold power, they choose an inflation rate, TR. Phillips's curve is: T; = n - 1.5 (u - Un). We assume that: Tp > TR.Natural unemployment rate: Un = 5%. An election is about to be held. Assume that expectations about inflation for the coming year are formed before the election. (Essentially, this assumption means that wages for the coming year are set before the election.) Moreover, it is assumed that the Democrats and Republicans have equal chance of winning the election. 1) Solve for expected inflation, in terms of tpand TR. 2) Suppose the Democrats win the election and implement their target inflation rate, Tp. If T, = 3.2% and TR = 1.5%. Solve for the unemployment rate ult. 3) Suppose the Republicans win the…
Figure 35-6 Use the graph below to answer the following questions. Inflation Rate D A Curve 1 F U/ B Curve 2 Unemployment Rate Refer to Figure 35-6. Curve 2 is the a. long-run Phillips curve. b. short-run aggregate demand curve. c. short-run Phillips curve. d. long-run aggregate demand curve.
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If the actual unemployment rate falls below the natural unemployment rate, how does the actual inflation rate change? The actual inflation rate ________. A. doesn't change, but the short-run Phillips curve shifts leftward B. rises up along the short-run Phillips curve C. doesn't change, but the expected inflation rate rises D. rises and the natural unemployment rate falls
The economy of Djibulistan is initially in long-run equilibrium. Then the CentralBank of Djibulistan increases the money supply.a. Assuming unexpected inflation as a result of the above-mentioned policy,explain any changes in output, unemployment, and inflation that arecaused by the monetary expansion. Explain your answer and conclusionsusing three graphs: IS-LM, AD-AS, and the Phillips curve. b. Assuming instead that resulting, inflation is expected, explain any changesin output, unemployment, and inflation that are caused by the monetaryexpansion. Explain your answer and conclusions using three graphs: ISLM, AD-AS, and the Phillips curve.

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