Starting on a Phillips curve with expected inflation equal to 5% and unemployment at its natural rate, show what happens to unemployment if the Fed tries to reduce inflation, but has no credibility. As time passes and people realize that the inflation rate is now lower, what happens to the short-run Phillips curve?
What will be an ideal response?
The unemployment rate rises as the economy moves along the Phillips curve and as inflation declines. As time passes, inflation expectations begin to decline, shifting the Phillips curve down and to the left until the unemployment rate returns to its natural rate and inflation and expected inflation are equal at a lower level.
You might also like to view...
Which of the following would cause the U.S. dollar to depreciate against the Japanese yen?
a. Greater popularity of U.S. exports in Japan. b. A higher price level in Japan. c. Higher real interest rates in the United States. d. Higher incomes in the United States.
Refer to the following table. If Jane's hourly wage rose from $2 per hour to $4 an hour and Jane had 6 hours to work or play, Jane would:SpendingTotal Utility of spending($)Hours of leisureTotal utility of leisure$260130$4110254$6148370$8172478$10180578$12186670
A. work 4 hours and play 2 hours when her wage is $2/hour but then work 3 hours and play 3 hours when her wage is $4 an hour. B. not work at $2 an hour and not play at $6 an hour. C. not play at either wage. D. work 4 hours and play 2 hours when her wage is $2/hour but then work 6 hours when her wage is $4 an hour.
If demand decreases while supply increases, then the equilibrium price
A. may increase, decrease, or stay the same. B. always increases. C. never changes. D. always decreases.
If a monopolist produces to a point at which marginal revenue is less than marginal cost then
A) the firm should increase output. B) the firm should reduce output. C) the firm is maximizing profits. D) we do not know if the firm should increase or reduce without more information.