Suppose the economy is in a long-run equilibrium.
a. Draw the economy’s short-run and long-run
Phillips curves.
b. Suppose a wave of business pessimism reduces
aggregate demand. Show the effect of this
shock on your diagram from part (a). If the Fed
undertakes expansionary
it return the economy to its original inflation
rate and original
c. Now suppose the economy is back in
long-run equilibrium, and then the price of
imported oil rises. Show the effect of this
shock with a new diagram like that in part
(a). If the Fed undertakes expansionary
monetary policy, can it return the economy
to its original inflation rate and original
unemployment rate? If the Fed undertakes
contractionary monetary policy, can it return
the economy to its original inflation rate and
original unemployment rate? Explain why
this situation differs from that in part (b)
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