Relationship between inflation and
Answer to Problem 1CQQ
Option “b” is the correct answer.
Explanation of Solution
Option (b):
When the Federal Reserve increases the money supply and expands aggregate
The increase in money supply reduces the interest rate, increases the inflation, and increases the investment. Increasing investment leads to an increase in the employment and income. When the inflation rate increases, the unemployment rate will decrease. There is a negative relationship between inflation and unemployment. Thus, option “b” is correct.
Option (a):
There is a negative relationship between inflation and unemployment. Therefore when inflation increases, the unemployment rate will fall. Thus, option “a” is incorrect.
Option (c):
When the Federal Reserve increases the aggregate demand, it leads to a higher inflation rate in the economy. Thus, option “c” is incorrect.
Option (d):
When the Federal Reserve increases the money supply and expands the aggregate demand, it moves the economy along the Phillips curve to a point with higher inflation and lower unemployment. The increase in demand will lead to an increase in the price level; ultimately leads to an increase in the inflation rate in the economy. Thus, option “d” is incorrect.
Philips curve: Phillips curve shows the inverse relationship between inflation and unemployment.
Inflation: Inflation refers to the tendency of increasing price.
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Chapter 22 Solutions
Principles of Macroeconomics (MindTap Course List)
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- The following graphs show the state of an economy that is currently in long-run equilibrium. The first graph shows the aggregate demand (AD) and long-run aggregate supply (LRAS) curves. The second shows the long-run and short-run Phillips curves (LRPC and SRPC). PRICE LEVEL INFLATION RATE 0 3 LRAS 4 5 LRPC 9 AD O AD LRAS 6 12 UNEMPLOYMENT RATE (Percent) 15 SRPC 18 Ⓒ SRPC - LRPCarrow_forwardSuppose that the government in the economy of the diagram below regards 9 percent unemployment as unacceptable. If the government insists on reducing the unemployment rate from 9 percent to 7 percent, regardless of the consequences, thena. pressure will build in the economy to continuously reduce the rate of inflation.b. the long-run Phillips curve becomes horizontal, freezing the rates of inflation and unemployment.c. the inflation rate will increase but the unemployment rate will stay at 7 percent.d. in the long run the rate of unemployment remains unchanged, but inflation will likely accelerate. Give explanations for the correct onearrow_forwardThe natural unemployment rate and the expected inflation rate are constant when moving along the _______, which shows a trade off between ________ and ________. A. aggregate demand curve; inflation; employment B. aggregate supply curve; inflation; unemployment C. short−run Phillips curve; inflation; unemployment D. short−run Phillips curve; inflation; employment E. long−run Phillips curve; inflation; unemploymentarrow_forward
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- Inflation at lowest rate in 5 years Inflation rate (percent per year) In September, inflation in the United Kingdom fell to 1.1% a year, its lowest in 5 years. Analysts expected an inflation rate of 1.3% a year. 1.7- Source: The New York Times, October 13, 2009 With the unemployment rate at 8 percent and the natural unemployment rate at 6 percent, sketch the short-run Phillips curve and mark on your graph the point which shows the situation in September. Label the point A. 1.5- 1.3- The unemployment rate is 8 percent and the natural unemployment rate is 6 percent. 1.1- Draw a point that shows the unemployment rate and the inflation rate in September. Label it A. 0.9+ 4 8 10 12 Draw a point that shows the natural unemployment rate and the expected Unemployment rate (percent of labor force) inflation rate. Label it B. >>> Draw only the objects specified in the question. Draw the short-run Phillips curve that is consistent with these data. Label it. ofarrow_forwardThe Economy in 2008In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy. Refer to The Economy in 2008. The short-run effects of rising world commodity prices are shown by a. moving to the right along the short-run Phillips curve. b. shifting the short-run Phillips curve right. c. moving to the left along the short-run Phillips curve. d. shifting the short-run Phillips curve left.arrow_forwardINFLATION RATE (Percent) 1 2 5. Expectations and the Phillips curve 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 LRPC 0 0 1 2 3 4 5 6 7 8 UNEMPLOYMENT RATE (Percent) Which of the following is true along SRPC? O The expected inflation rate is 5%. The natural rate of unemployment is 3%. The actual unemployment rate is 6%. • } - * SRPC2 ㄢ C (?) 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) 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…arrow_forward
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