1 VPCInflationAPC = 998PC = 77MR6.PC = 55PC = 34321OutputFigure 9 The MR and PC curvesFigure 9 shows the impact of a supply shock to the economy which has increased inflation to 9% a year(point A) and this level of inflation becomes embedded as the expected rate of inflation, so the economyis located on the PC curve, PC = 9. The central bank's monetary rule is shown by the curve labelled MRand the inflation target that it wants to return to is 2% a year (point B). As a first step, the central bankraises interest rates to reduce aggregate demand moving the economy to point t in Figure 9. Which oneof the labelled points does the economy move to next?Select one:y

A. W. Phillips invented the Phillips curve, which states that inflation and unemployment have a…

Answered: VPC Inflation % PC 8 PC 7 MR 6. PC PC 2…

Business

Economics

VPC Inflation % PC 8 PC 7 MR 6. PC PC 2 B Outn 4. 3.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

VPC
Inflation
A
PC = 9
9
8
PC = 7
7
MR
6.
PC = 5
5
PC = 3
4
3
2
1
Output
Figure 9 The MR and PC curves
Figure 9 shows the impact of a supply shock to the economy which has increased inflation to 9% a year
(point A) and this level of inflation becomes embedded as the expected rate of inflation, so the economy
is located on the PC curve, PC = 9. The central bank's monetary rule is shown by the curve labelled MR
and the inflation target that it wants to return to is 2% a year (point B). As a first step, the central bank
raises interest rates to reduce aggregate demand moving the economy to point t in Figure 9. Which one
of the labelled points does the economy move to next?
Select one:
y

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