Suppose the current inflation rate and the expected inflation rate are both 3 percent. The current unemployment rate and the natural rate of unemployment are both 4 percent
Use a Phillips curve graph to show the effect on the economy of a severe supply shock. If the Federal Reserve keeps monetary policy unchanged, what will eventually happen to the unemployment rate? Show this on your Phillips curve graph.
The supply shock will shift the short-run Phillips curve up as both the actual inflation rate and the expected inflation rate will increase. The unemployment rate will also increase as the economy moves into recession. If the Fed keeps monetary policy unchanged, the recession will cause workers and firms to lower their expectations of future inflation, and the short-run Phillips curve will shift back down to its previous position. Eventually the unemployment rate will return to the natural rate of 4 percent.
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Indicate whether the statement is true or false
In the new Keynesian model, the ultimate effect on inflation of an anticipated aggregate demand shock is ________
A) less than if that event was unanticipated B) greater than if that event was unanticipated C) the same as would develop if that event had never occurred D) independent of whether or not that event is anticipated or unanticipated
If all of the money currently spent on redistribution in the United States were directly transferred to the poor _____
a. it could turn the hard-core poor into the marginal poor b. it would not turn the hard-core poor into the marginal poor c. it is unclear what the effect would be on the hard-core poor d. the income of the poor would be raised above the current national average
Which of the following will most likely occur in the short run when the long-run equilibrium of an economy is disturbed by an unanticipated decrease in aggregate demand?
a. a decrease in output and a higher price level b. an increase in output and a higher price level c. a decrease in output and a lower price level d. an increase in output while prices remain unchanged