Please answer the stuff in the red brackets, I included the information before as context. 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.SRPC,LRPC7SRPC,21123478UNEMPLOYMENT RATE (Percent)INFLATION RATE (Percent) Suppose that the Fed suddenly and unexpectedly decreases the money supply in an effort to reduce inflation. As a result of this unanticipated action,actual inflation falls to 3%.On the previous graph, use the black point (plus symbol labeled "B") to illustrate the short-run effects of this policy.Now, suppose that-after a period of 3% inflation-households and firms begin to expect that the inflation rate will continue to be 3%.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 SRPC.Finally, using the orange point (square symbol labeled "C"), indicate on the previous graph the new, long-run equilibrium for this economy.The inflation rate at point C isthe infiation rate at point A, and the unemployment rate at point C istheunemployment rate at point A.Was the Fed able to achieve its goal of lowering inflation?O No, because the Fed cannot affect the inflation rate through monetary policy.O Yes, but only in the short run; in the long run, inflation returned to its natural rate.O Yes, the Fed's policy successfully reduced inflation in both the short run and the long run.

Philip’s curve (short-run) shows the relationship between the unemployment rate and the inflation rate. This curve says that there is an inverse relationship between the unemployment rate and inflation rate. It means there is a trade-off between the inflation rate and the unemployment rate.The above figure follows that the inflation rate at point C is greater than the inflation rate at point A, and the unemployment rate at point C is the same as the unemployment rate at point A. Thus, the fed can lower inflation but only in the short run as in the long-run inflation rate returned to its natural level.Hence, the correct option is (b).

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The inflation rate at point C is the inflation rate at point A, and the unemployment rate at point C is the unemployment rate at point A. Was the Fed able to achieve its goal of lowering inflation? No, because the Fed cannot affect the inflation rate through monetary policy. Yes, but only in the short run; in the long run, inflation returned to its natural rate. Yes, the Fed's policy successfully reduced inflation in both the short run and the long run.

The inflation rate at point C is the inflation rate at point A, and the unemployment rate at point C is the unemployment rate at point A. Was the Fed able to achieve its goal of lowering inflation? No, because the Fed cannot affect the inflation rate through monetary policy. Yes, but only in the short run; in the long run, inflation returned to its natural rate. Yes, the Fed's policy successfully reduced inflation in both the short run and the long run.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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