5. The Phillips curve in the late 20th century The following table presents historical unemployment and inflation data in the United States for the years 1974 through 1978. Unemployment Rate Inflation Rate Year (Percent) (Percent) 1974 5.6 11.0 1975 8.5 9.1 1976 7.7 5.8 1977 7.1 6.5 1978 6.1 7.6 Plot the data for these five years on the following graph. Note: You will not be graded on how you plot the points, but plotting the points accurately on the graph will help you examine the relationship between unemployment and inflation during this period and solve the problems that follow.Note: You will not be graded on how you plot the points, but plotting the points accurately on the graph will help you examine the relationship between unemployment and inflation during this period and solve the problems that follow. 13 12 Data Points 11 10 INFLATION RATE (Percent) CO 6 2 3 4 5 6 7 8 9 10 11 UNEMPLOYMENT RATE (Percent)which of the following statements most accurately describes the relationship between ination and unemployment in the United States during this time period? O The shortrun Phillips curve remained stable. 0 The shortrun Phillips curve shifted to the left after actual ination was lower than expected. O The shortrun Phillips curve shifted to the right after actual ination was higher than expected. The following graph shows the shortrun Phillips curve (SRPC) for the United States in 197'4. Shift the curve to J'Hustrate what happened between I 974 and 1978. SRPC INFLATION RATE SRPC UNEMPLOYMENT RATE The following graph shows the aggregate demand (AD) and shortrun aggregate supply (AS) curves for the United States in 19?4. The following graph shows the aggregate demand (AD) and shortrun aggregate supply (AS) curves for the United States in 19?4. Shift the aggregate supply curve to approximate what happened behveen 1974 and 1978. ('3 AD AS PRICE IJEVEL AD OUTPUT 6. Expectations and the Phillips curve The following graph plots the long-run Phillips curve (LRPC) and short-run Phillips curve (SRPC, ) for an economy currently experiencing long-run equilibrium at point A (grey star symbol). CO SRPC LRPC + B 6 A SRPC, INFLATION RATE (Percent) 1 2 3 4 5 6 7 8 UNEMPLOYMENT RATE (Percent)which of the following is true along SRPUI? O The actual ination rate is 5%. O The natural rate of unemployment is 3%. O The expected ination rate is 5%. O The actual unemployment rate is 6%. Suppose that the central bank for this economy suddenly and unexpectedly decreases the money supply in an effort to reduce ination. As a result of this unanticipated policy action, actual ination falls to 3%. Oh the previous graph, use the black point (plus symbol labeled \"8") to illustrate the shortrun effects of this policy. Suppose that now, after a period of 3% inflation, households and firms begin to expect that the ination rate will persist at the level of 3%. Oh the previous graph, use the purple line (diamond symbol) to draw SRPCE, the shortrun Phillips curve that is consistent with these expectations, assuming that lt is parallel to SRPCJ. Finally, using the orange point (square symbol labeled "C"), indicate on the previous graph the new, long-run equilibrium for this economy. The inflation rate at point C is the inflation rate at point A, and the unemployment rate at point C is the unemployment rate at point A. Was the central bank able to achieve its goal of lowering inflation? O Yes, the central bank's policy successfully reduced inflation in both the short run and the long run. O No, because the central bank cannot affect the inflation rate through monetary policy. Yes, but only in the short run; in the long run, inflation returned to its natural rate. Now, suppose that the public fully anticipates the central bank's decision to decrease the money supply. Assume the public also believes that the monetary authority is firmly committed to carrying out this policy. According to rational expectations theory, when the economy is in long-run equilibrium, a fully anticipated decrease in the money supply will cause the economy to move on the previous Phillips curve graph. In this case, rational expectations theory predicts that the fully anticipated decrease in the money supply will have the immediate effect of in the inflation rate and in the unemployment rate.The inflation rate at point C is the inflation rate at point A, and the unemployment rate at point C is the unemployment rate at point A. lower than Was the central bank able to a the same as of lowering inflation? Yes, the central bank higher than ssfully reduced inflation in both the short run and the long run. O No, because the central bank cannot affect the inflation rate through monetary policy. O Yes, but only in the short run; in the long run, inflation returned to its natural rate.The inflation rate at point C is the inflation rate at point A, and the unemployment rate at point C is the unemployment rate at point A. the same as Was the central bank able to achieve its goal of lowering inflation? lower than O Yes, the central bank's policy successfully reduced inflation in both the short run and the long run. higher than O No, because the central bank cannot affect the inflation rate through monetary policy. O Yes, but only in the short run; in the long run, inflation returned to its natural rate.Was the central bank able to achieve its goal of lowering inflation? Yes, the central bank's policy successfully reduced inflation in both the short run and from A to B permanently O No, because the central bank cannot affect the inflation rate through monetary polic from A to B and then back to A O Yes, but only in the short run; in the long run, inflation returned to its natural rate. directly from A to C from A to B to C and then back to B Now, suppose that the public fully anticipates the central bank's decision to decrease the mon ves that the from A to B and then to C monetary authority is firmly committed to carrying out this policy. According to rational expect long-run equilibrium, a fully anticipated decrease in the money supply will cause the economy to move on the previous Phillips curve graph. In this case, rational expectations theory predicts that the fully anticipated decrease in the money supply will have the immediate effect of in the inflation rate and in the unemployment rate.an increase Now, suppose that l anticipates the central bank's decision to decrease the money supply. Assume the public also believes that the monetary authority a decrease itted to carrying out this policy. According to rational expectations theory, when the economy is in longrun equilibrium, a fully . rease in the money supply will cause the economy to move V on the no change previous Phillips cu is case, rational expectations theory predicts that the fully anticipated decrease in the money supply will have the immediate effect of v in the ination rate and V in the unemployment rate. Now, suppose that the public fully anticipates the central bank no change decrease the money supply. Assume the public also believes that the monetary authority is firmly committed to carrying out this pol an increase to rational expectations theory, when the economy is in long-run equilibrium, a fully anticipated decrease in the money supply v conomy to move on the a decrease previous Phillips curve graph. In this case, rational expectation cts that the fully anticipated decrease in the money supply will have the immediate effect of in the inflation rate and in the unemployment rate