The following graph shows an economy in long-run equilibrium at point A (grey star symbol). The vertical line is the long-run Phillips curve (LRPC). The downward-sloping curve labeled SRPC is the short-run Phillips curve passing through point A. INFLATION RATE (Percent) ཝ་ཤ་ཁ་ཀ་༥ 1 SRPC LRPC 0 0 1 2 3 UNEMPLOYMENT RATE (Percent) Which of the following is true along SRPC? The natural rate of unemployment is 2%. The actual unemployment rate is 1%. The expected inflation rate is 2%. SRPC2 с Suppose that the Fed suddenly and unexpectedly increases the money supply in an effort to reduce unemployment. As a result of this unanticipated action, actual inflation rises to 5%. On the previous graph, use the black point (plus symbol) to illustrate the short-run effects of this policy. Now, suppose that-after a period of 5% inflation-households and firms begin to expect that the inflation rate will continue to be 5%. 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 SRPC₁. Finally, use the orange point (square symbol) to indicate the new, long-run equilibrium for this economy. The inflation rate at the new long-run equilibrium (point C) is the unemployment rate at point A. Was the Fed able to achieve its goal of lowering unemployment? the inflation rate at point A, and the unemployment rate at point C is ◇ Yes, but only in the short run; in the long run, unemployment returned to its natural rate. No, because the Fed cannot affect the unemployment rate through monetary policy. O Yes, the Fed's policy successfully reduced unemployment in both the short run and the long run. Now, suppose that the public fully anticipates the Fed's decision to increase the money supply. Assume the public also believes that the Fed is firmly committed to carrying out this policy. According to rational expectations theory, when the economy is in long-run equilibrium, a fully anticipated increase in the money supply will cause the economy to move ▼on the previous Phillips curve graph. In this case, rational expectations theory predicts that the fully anticipated increase in the money supply will have the immediate effect of in the inflation rate and in the unemployment rate. The following graph shows an economy in long-run equilibrium at point A (grey star symbol). The vertical line is the long-run Phillips curve (LRPC). The downward-sloping curve labeled SRPC₁ is the short-run Phillips curve passing through point A. INFLATION RATE (Percent) 1 SRPC 0 0 1 2 LRPC 4 UNEMPLOYMENT RATE (Percent) + SRPC2 C Which of the following is true along SRPC? The natural rate of unemployment is 2%. The actual unemployment rate is 1%. O The expected inflation rate is 2%. Suppose that the Fed suddenly and unexpectedly increases the money supply in an effort to reduce unemployment. As a result of this unanticipated action, actual inflation rises to 5%. On the previous graph, use the black point (plus symbol) to illustrate the short-run effects of this policy. Now, suppose that-after a period of 5% inflation-households and firms begin to expect that the inflation rate will continue to be 5%. 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 SRPC₁. Finally, use the orange point (square symbol) to indicate the new, long-run equilibrium for this economy. The inflation rate at the new long-run equilibrium (point C) is the unemployment rate at point A. Was the Fed able to achieve its goal of lowering unemployment? the inflation rate at point A, and the unemployment rate at point C is from A to B and then to C ◇ Yes, but only in the short run; in the long run, unem O No, because the Fed cannot affect the unemploymen from A to B to C and then back to B O Yes, the Fed's policy successfully reduced unemploy from A to B and then back to A from A to B permanently directly from A to C run. ume the public also believes that the Fed is firmly in long-run equilibrium, a fully anticipated Now, suppose that the public fully anticipates the Fed's decis committed to carrying out this policy. According to rational exp increase in the money supply will cause the economy to move case, rational expectations theory predicts that the fully anticipated increase in the money supply will have the immediate effect of on the previous Phillips curve graph. In this in the inflation rate and in the unemployment rate.