The following graph shows the current short-run Phillips curve for a hypothetical economy; the point on the graph shows the initial unemployment rate and inflation rate. Assume that the economy is currently in long-run equilibrium. Suppose the central bank of the hypothetical economy decides to decrease the money supply. On the following graph, shift the curve or drag the blue point along the curve, or do both, to show the short-run effects of this policy.
The following graph shows the current short-run Phillips curve for a hypothetical economy; the point on the graph shows the initial unemployment rate and inflation rate. Assume that the economy is currently in long-run equilibrium. Suppose the central bank of the hypothetical economy decides to decrease the money supply. On the following graph, shift the curve or drag the blue point along the curve, or do both, to show the short-run effects of this policy.
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Transcribed Image Text:(?
5
UNEMPLOYMENT RATE (Percent)
In the long run, the decrease in the money supply results in
in the inflation rate and
v in the unemployment rate
(relative to the economy's initial equilibrium).
INFLATION RATE (Perent)
Transcribed Image Text:8. Monetary policy and the Phillips curve
The following graph shows the current short-run Phillips curve for a hypothetical economy; the point on the graph shows the initial unemployment rate
and inflation rate. Assume that the economy is currently in long-run equilibrium.
Suppose the central bank of the hypothetical economy decides to decrease the money supply.
On the following graph, shift the curve or drag the blue point along the curve, or do both, to show the short-run effects of this policy.
Hint: You may assume that the central bank's move was unanticipated.
SR Phillips Curve
SR Phillips Curve
3
5
UNEMPLOYMENT RATE (Percent)
In the short run, an unexpected decrease in the money supply results in
in the inflation rate and
in the
unemployment rate.
On the following graph, shift the curve or drag the blue point along the curve, or do both, to show the long-run effects of the decrease in the money
supply.
INFLATION RATE (Perent)
2.
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