Answered: Monetary policy and the Phillips curve…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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 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.

In the short run, an unexpected decrease in the money supply results in (increase, decrease, no change) in the inflation rate and (increase, decrease, no change) in the unemployment rate.

SR Philps Curve
SR Pos Curve
UNEMPLOYMENT RATE (Percent)
quo uH NOUY NI

Definition Definition Relationship between the rate of unemployment and the rate of inflation that shows that the lower the initial rate of unemployment, the greater the rise in wage rate corresponding to a given rise in the rate of unemployment. The Phillips curve assumes that the ratio between prices and nominal wage rates is constant in the short run. Presented graphically, the Phillips curve shows an inverse relationship between the rate of unemployment and the rate of inflation.

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