1. Monetary policy and the Phillips curveThe 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. INFLATION RATE (Percent)65001ISR Phillips Curve342UNEMPLOYMENT RATE (Percent)56In the short run, an unexpected decrease in the money supply results inunemployment rate.SR Phillips Curvein the inflation rate andin the INFLATION RATE (Percent)60012UNEMPLOYMENT RATE (Percent)345In the long run, the decrease in the money supply results in(relative to the economy's initial equilibrium).6(?)in the inflation rate and▼in the unemployment rate

The graphs above demonstrate the Phillips curve, a concept in economics that asserts that…

Answered: Monetary policy and the Phillips curve…

Principles of Economics (MindTap Course List)

8th Edition

ISBN:9781305585126

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter35: The Short-Run Trade-off Between Inflation And Unemployment

Section: Chapter Questions

Problem 5CQQ

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1. Monetary policy and the Phillips curve

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.

INFLATION RATE (Percent)
6
5
0
0
1
I
SR Phillips Curve
3
4
2
UNEMPLOYMENT RATE (Percent)
5
6
In the short run, an unexpected decrease in the money supply results in
unemployment rate.
SR Phillips Curve
in the inflation rate and
in the

INFLATION RATE (Percent)
6
0
0
1
2
UNEMPLOYMENT RATE (Percent)
3
4
5
In the long run, the decrease in the money supply results in
(relative to the economy's initial equilibrium).
6
(?)
in the inflation rate and
▼in the unemployment rate

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