this unanticipated policy 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. Suppose that now, after a period of 3% inflation, households and firms begin to expect that the inflation rate will persist at the level of 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 SRPC₂- 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 Cis unemployment rate at point A. the inflation rate at point A, and the unemployment rate at point Cis Was the central bank able to achieve its goal of lowering inflation? O Yes, the central bank's policy successfully reduced inflation in both the short run and the long run. the

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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Suppose that the central bank for this economy suddenly and unexpectedly decreases the money supply in an effort to reduce inflation. As a result of
this unanticipated policy 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.
Suppose that now, after a period of 3% inflation, households and firms begin to expect that the inflation rate will persist at the level of 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 SRPC₂-
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 is
unemployment rate at point A.
the inflation rate at point A, and the unemployment rate at point C is
Was the central bank able to achieve its goal of lowering inflation?
O Yes, the central bank's policy successfully reduced inflation in both the short run and the long run.
O Yes, but only in the short run; in the long run, inflation returned to its natural rate.
O No, because the central bank cannot affect the inflation rate through monetary policy.
the
Now, suppose that the public fully anticipates the central bank's decision to decrease the money supply. Assume the public also believes that the
monetary authority is firmly committed to carrying out this policy. According to rational expectations theory, when the economy is in long-run
equilibrium, a fully anticipated decrease in the money supply will cause the economy to move
previous Phillips curve graph. In this case, rational expectations theory predicts that the fully anticipated decrease in the money supply will have the
immediate effect of
in the inflation rate and
in the unemployment rate.
on the
Transcribed Image Text:Suppose that the central bank for this economy suddenly and unexpectedly decreases the money supply in an effort to reduce inflation. As a result of this unanticipated policy 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. Suppose that now, after a period of 3% inflation, households and firms begin to expect that the inflation rate will persist at the level of 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 SRPC₂- 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 is unemployment rate at point A. the inflation rate at point A, and the unemployment rate at point C is Was the central bank able to achieve its goal of lowering inflation? O Yes, the central bank's policy successfully reduced inflation in both the short run and the long run. O Yes, but only in the short run; in the long run, inflation returned to its natural rate. O No, because the central bank cannot affect the inflation rate through monetary policy. the Now, suppose that the public fully anticipates the central bank's decision to decrease the money supply. Assume the public also believes that the monetary authority is firmly committed to carrying out this policy. According to rational expectations theory, when the economy is in long-run equilibrium, a fully anticipated decrease in the money supply will cause the economy to move previous Phillips curve graph. In this case, rational expectations theory predicts that the fully anticipated decrease in the money supply will have the immediate effect of in the inflation rate and in the unemployment rate. on the
If there were many suppliers of diamonds, the price would be
If there were only one supplier of diamonds, the price would be
Suppose Russia and South Africa forma cartel.
In this case, the price would be
evenly, South Africa would produce (
per diamond and the quantity sold would be
per diamond and the quantity sold would be
per diamond and the total quantity sold would be
diamonds and earn a profit of
Why are cartel agreements often not successful?
If South Africa increased its production by 1,000 diamonds while Russia stuck to the cartel agreement, South Africa's profit
would
O One party has an incentive to cheat to make more profit.
All parties would make more money if everyone increased production,
O Different firms experience different costs.
diamonds.
diamonds.
diamonds. If the countries split the market i
Transcribed Image Text:If there were many suppliers of diamonds, the price would be If there were only one supplier of diamonds, the price would be Suppose Russia and South Africa forma cartel. In this case, the price would be evenly, South Africa would produce ( per diamond and the quantity sold would be per diamond and the quantity sold would be per diamond and the total quantity sold would be diamonds and earn a profit of Why are cartel agreements often not successful? If South Africa increased its production by 1,000 diamonds while Russia stuck to the cartel agreement, South Africa's profit would O One party has an incentive to cheat to make more profit. All parties would make more money if everyone increased production, O Different firms experience different costs. diamonds. diamonds. diamonds. If the countries split the market i
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