4. 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. On the following graph, shift the short-run (SR) Phillips curve or drag the blue point along the curve, or do both, to show the short-run effects of this policy. Hint: You may assume that the central bank's move was unanticipated. INFLATION RATE (Percent) 10 10 N 0 0 I I 3 O SR Phillips Curve 12 UNEMPLOYMENT RATE (Percent) 15 18 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

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4. 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.
On the following graph, shift the short-run (SR) Phillips curve or drag the blue point along the curve, or do both, to show the short-run effects of this
policy.
Hint: You may assume that the central bank's move was unanticipated.
INFLATION RATE (Percent)
8
5
3
N
1
0
0
3
9
SR Phillips Curve
8
12
UNEMPLOYMENT RATE (Percent)
15
18
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
Transcribed Image Text:4. 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. On the following graph, shift the short-run (SR) Phillips curve or drag the blue point along the curve, or do both, to show the short-run effects of this policy. Hint: You may assume that the central bank's move was unanticipated. INFLATION RATE (Percent) 8 5 3 N 1 0 0 3 9 SR Phillips Curve 8 12 UNEMPLOYMENT RATE (Percent) 15 18 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
On the following graph, shift the long-run (LR) Phillips curve or drag the blue point along the curve, or do both, to show the long-run effects of the
decrease in the money supply.
INFLATION RATE (Percent)
CO
6
5
1
0
0
3
LR Phillips Curve
9
8
12
UNEMPLOYMENT RATE (Percent)
15
In the long run, the decrease in the money supply results in
(relative to the economy's initial equilibrium).
18
LR Phillips Curve
?
in the inflation rate and
in the unemployment rate
Transcribed Image Text:On the following graph, shift the long-run (LR) Phillips curve or drag the blue point along the curve, or do both, to show the long-run effects of the decrease in the money supply. INFLATION RATE (Percent) CO 6 5 1 0 0 3 LR Phillips Curve 9 8 12 UNEMPLOYMENT RATE (Percent) 15 In the long run, the decrease in the money supply results in (relative to the economy's initial equilibrium). 18 LR Phillips Curve ? in the inflation rate and in the unemployment rate
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