The actions of FED to move from high
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 GDP to increase along with the price level and lowering the rate of unemployment in the economy. So in order to move from a point on Phillips curve which represents higher unemployment rate with lower inflation rate to a point where the unemployment rate is lower and the inflation rate is higher, the FED should undertake the expansionary monetary policy.
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 17 Solutions
Macroeconomics (7th Edition)
- 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_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_forwardA well-known economic model called the Phillips Curve (discussed in The Keynesian Perspective) describes the short run tradeoff typically observed between inflation and unemployment. Based on expansionary and contractionary monetary policy, explain why one of these variables usually falls when the other rises.arrow_forward
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