The following graph plots the short-run Phillips curve for a hypothetical economy. The given point on the graph indicates the initial rates of unemployment and inflation. 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. INFLATION RATE (Percent) 5 1 INFLATION RATE (Percent) 0 6 5 0 1 0 3 In the short run, an unexpected decrease in the money supply results in unemployment rate. 0 6 12 UNEMPLOYMENT RATE (Percent) 9 3 SR Phillips Curve On the following graph, shift the 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. 9 15 6 12 UNEMPLOYMENT RATE (Percent) 18 15 In the long run, the decrease in the money supply results in (relative to the economy's initial equilibrium). SR Phillips Curve 18 (?) (?) in the inflation rate and in the in the inflation rate and in the unemployment rate

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8. Monetary policy and the Phillips curve
The following graph plots the short-run Phillips curve for a hypothetical economy. The given point on the graph indicates the initial rates of
unemployment and inflation. 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.
INFLATION RATE (Percent)
5
2
INFLATION RATE (Percent)
1
0
6
5
0
1
0
3
In the short run, an unexpected decrease in the money supply results in
unemployment rate.
0
9
6
12
UNEMPLOYMENT RATE (Percent)
3
SR Phillips Curve
On the following graph, shift the 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.
O
6
UNEMPLOYMENT RATE (Percent)
9
15
12
18
15
In the long run, the decrease in the money supply results in
(relative to the economy's initial equilibrium).
SR Phillips Curve
18
-O
(?)
(?)
in the inflation rate and
in the
in the inflation rate and
in the unemployment rate
Transcribed Image Text:8. Monetary policy and the Phillips curve The following graph plots the short-run Phillips curve for a hypothetical economy. The given point on the graph indicates the initial rates of unemployment and inflation. 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. INFLATION RATE (Percent) 5 2 INFLATION RATE (Percent) 1 0 6 5 0 1 0 3 In the short run, an unexpected decrease in the money supply results in unemployment rate. 0 9 6 12 UNEMPLOYMENT RATE (Percent) 3 SR Phillips Curve On the following graph, shift the 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. O 6 UNEMPLOYMENT RATE (Percent) 9 15 12 18 15 In the long run, the decrease in the money supply results in (relative to the economy's initial equilibrium). SR Phillips Curve 18 -O (?) (?) in the inflation rate and in the in the inflation rate and in the unemployment rate
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