The actions of FED to move from high unemployment and lower inflation to low unemployment and high inflation point on Phillips curve .
Explanation of Solution
The Phillips curve is used by the economists to depict the short-run relation between the inflation rate and the unemployment rate in an economy. The inflation rate and the unemployment rate are the two evils which every economy tries to minimize in the short-run as well as in the long-run. But, the government cannot reduce them both at the same time. When they focus on reducing the unemployment rate, it will lead to an increase in the inflation rate and vice versa. This trade-off between the inflation rate and unemployment is explained with the help of the Phillips curve.
In order to eradicate unemployment, the FED would like to take the expansionary
Thus, the expansionary monetary policy by the FED increases the aggregate demand of the economy, which will cause the real
Concept introduction:
Phillips curve: Phillips curve shows the relationship and trade-off between the inflation rate and unemployment rate in an economy during the short-run period.
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Chapter 28 Solutions
Economics (7th Edition) (What's New in Economics)
- Homework (Ch 23) The following graph shows a short-run Phillips curve for a hypothetical economy. Show the short-run effect of a contractionary monetary policy by dragging the point along the short-run Phillips curve (SRPC) or shifting the curve to the appropriate position. ? 12 11 10 9 1 INFLATION RATE (Percent) 8 I SRPC H SRPC Q Clarrow_forwardSuppose that the current inflation rate is at 9% and the unemployment rate is 3%. Given this data. what monetary policy action would should the Federal Reserve take? How would this affect the economy, the inflation rate, and the unemployment rate?arrow_forwardIf firms and workers have adaptive expectations, what impact will contractionary monetary policy have on inflation, unemployment, and the Phillips curve? If expectations are adaptive, how will the economy adjust to a new, long-run equilibrium in response to contractionary monetary policy?arrow_forward
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- The "rational expectations" school of economists, including Robert Lucas and Thomas Sargent, argue that changes in monetary policy cannot affect unemployment rates in the short run or long run. True Falsearrow_forwardWhat is the appropriate monetary policy to be implemented by the Federal Reserve System during periods of high inflation? Explain the steps the Fed will take.arrow_forwardIf wages and prices adjust slowly, we would expect expansionary monetary policy to be less likely to reduce the natural unemployment rate. more likely to reduce inflation. more likely to affect the unemployment rate. more likely to result in a vertical short-run Phillips curve.arrow_forward
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