Use the following graph to answer these questions (assume the economy starts at Point A):

a. If the Fed increases the growth rate of the money supply, to which point is the economy most likely to move in the short run? In the long run?

b. If the government decreases government spending, to which point is the economy likely to move in the short run?

c. Workers come to expect a higher rate of inflation, and they demand higher wages. To which point might the economy move?

Transcribed Image Text:

Inflation Rate B C D PC-1 Unemployment Rate PC-0