The graph shows the short-run and long-run Phillips curves. The current inflation rate is 5 percent a year. The Fed announces that it will slow the money growth rate so that inflation will fall to 2.5 percent a year. If no one believes the Fed, but the Fed keeps inflation at 2.5 percent for many years, explain the effect of the Fed's action on inflation and unemployment. O A. The inflation rate and unemployment rate fluctuate: first unemployment rises above 6 percent, then falls below 6 percent, and finally returns to 6 percent. The inflation rate keeps falling through this cycle in unemployment. B. At first, the unemployment rate rises above 6 percent and the inflation rate falls. Later, as the inflation rate approaches 2.5 percent a year, the unemployment rate falls toward 6 percent. O C. No changes occur to either the inflation rate or the unemployment rate. Changes only occur if people believe the Fed. D. The inflation rate falls toward 2.5 percent and the unemployment rate remains constant at 6 percent. O E. At first, the unemployment rate falls below 6 percent and the inflation rate falls. Later, as the inflation rate approaches 2.5 percent a year, the unemployment rate rises toward 6 percent.
The graph shows the short-run and long-run Phillips curves. The current inflation rate is 5 percent a year. The Fed announces that it will slow the money growth rate so that inflation will fall to 2.5 percent a year. If no one believes the Fed, but the Fed keeps inflation at 2.5 percent for many years, explain the effect of the Fed's action on inflation and unemployment. O A. The inflation rate and unemployment rate fluctuate: first unemployment rises above 6 percent, then falls below 6 percent, and finally returns to 6 percent. The inflation rate keeps falling through this cycle in unemployment. B. At first, the unemployment rate rises above 6 percent and the inflation rate falls. Later, as the inflation rate approaches 2.5 percent a year, the unemployment rate falls toward 6 percent. O C. No changes occur to either the inflation rate or the unemployment rate. Changes only occur if people believe the Fed. D. The inflation rate falls toward 2.5 percent and the unemployment rate remains constant at 6 percent. O E. At first, the unemployment rate falls below 6 percent and the inflation rate falls. Later, as the inflation rate approaches 2.5 percent a year, the unemployment rate rises toward 6 percent.
Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter17: The Short-run Trade-off Between Inflation And Unemployment
Section: Chapter Questions
Problem 6CQQ
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