Exhibit 17-5 Short-run and long-run Phillips curve
Suppose the government shown in Exhibit 17-5 uses contractionary monetary policy to reduce inflation from 9 to 6 percent. If people have rational expectations, then:
A. the economy will remain stuck at point E1.
B. the natural rate will permanently increase to 8 percent.
C. unemployment will rise to 8 percent in the short run.
D. unemployment will remain at 6 percent as the inflation rate falls.
Answer: D
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