### Understanding the Short-Run Phillips CurveThe following graph illustrates the current short-run Phillips curve for a hypothetical economy. This curve demonstrates the relationship between the unemployment rate and the inflation rate in the short run. The point on the graph represents the initial unemployment rate and inflation rate, assuming the economy is currently in long-run equilibrium.The central bank of this hypothetical economy decides to decrease the money supply.**Instruction:**On the following graph, shift the curve or move the blue point along the curve, or do both, to exhibit the short-run effects of the policy of decreasing the money supply.**Hint:** Assume that the central bank's move is unanticipated.#### Graph ExplanationThe graph includes:- **Y-Axis (Vertical):** Inflation Rate (Percent) - The range is from 0 to 6 percent.- **X-Axis (Horizontal):** Unemployment Rate (Percent) - The range is from 0 to 18 percent. The graph plots a downward-sloping line labeled "SR Phillips Curve," which signifies the short-run Phillips curve. The line starts at an inflation rate of 6 percent with a 0 percent unemployment rate and ends at an 18 percent unemployment rate with a 0 percent inflation rate, showing an inverse relationship.A blue point is placed at an inflation rate of 3 percent and an unemployment rate of 9 percent, indicating the initial condition of the economy.#### Analysis of Policy ImpactIn the short run, an unanticipated decrease in the money supply results in:- a decrease in the inflation rate- an increase in the unemployment rateThis movement reflects the new position along the Phillips curve as the economy adjusts to the policy change. ---**Note to educators:** Teach how unanticipated changes in monetary policy can cause short-term fluctuations in unemployment and inflation rates, emphasizing the importance of understanding the Phillips curve for macroeconomic policy-making. ### Long-Run Effects of a Decrease in the Money Supply#### Understanding the GraphThe graph provided illustrates the relationship between the unemployment rate (x-axis) and the inflation rate (y-axis). - **Horizontal Axis (x-axis):** Represents the unemployment rate in percentage.- **Vertical Axis (y-axis):** Represents the inflation rate as a percentage.The diagonal line on the graph represents the Phillips Curve, which shows the inverse relationship between the inflation rate and the unemployment rate. There is a blue point on the graph that can be moved along the curve to represent different inflation and unemployment scenarios.#### Key Observations:- **Initial Position:** The blue point on the graph is initially positioned where the inflation rate is at 3% and the unemployment rate is at 9%.- **Adjustments:** The graph allows manipulation to show potential long-run effects due to a change in the money supply.#### Explanation of the Long-Run EffectsIn the long run, a decrease in the money supply typically results in changes to both the inflation rate and the unemployment rate:1. **Decrease in Inflation Rate:** A decrease in the money supply often leads to a reduction in inflation. This is due to lower demand-pull inflation as there is less money circulating in the economy.2. **Impact on Unemployment Rate:** The long-term impact on the unemployment rate can vary. However, classical economic theory posits that, in the long run, unemployment tends to return to its natural rate, unaffected by changes in the money supply.---#### Text ExplanationBelow the graph, a text is provided for further explanation:> "In the long run, the decrease in the money supply results in ___ in the inflation rate and ___ in the unemployment rate (relative to the economy's initial equilibrium)." To answer this:- The inflation rate decreases due to the reduced money supply.- The long-term effect on unemployment is more complex, but it often returns to a natural rate, suggesting minimal long-term changes in unemployment due to money supply changes alone.#### Educational TakeawayThrough this exercise, the learner can understand how monetary policy, particularly changes in the money supply, impacts economic indicators such as inflation and unemployment both in the short run and long run.

Short run Philips curve shows inverse relationship between inflation and unemployment rate

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. INFLATION RATE (Percent) 5 0 0 3 SR Phillips Curve 9 12 UNEMPLOYMENT RATE (Percent) 15 18 In the short run, an unexpected decrease in the money supply results in unemployment rate. OF SR Phillips Curve in the inflation rate and in the

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. INFLATION RATE (Percent) 5 0 0 3 SR Phillips Curve 9 12 UNEMPLOYMENT RATE (Percent) 15 18 In the short run, an unexpected decrease in the money supply results in unemployment rate. OF SR Phillips Curve in the inflation rate and in the

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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