7. The long-run effects of monetary policy

The following graphs show the state of an economy that is currently in long-run equilibrium. The first graph shows the aggregate demand (AD) and long-run aggregate supply (LRAS) curves. The second shows the long-run and short-run Phillips curves (LRPC and SRPC).

AD

LRAS

0

3

6

9

12

15

18

PRICE LEVEL

OUTPUT (Trillions of dollars)

AD

LRAS

SRPC

LRPC

0

2

4

6

8

10

12

INFLATION RATE

UNEMPLOYMENT RATE (Percent)

SRPC

LRPC

Which of the following statements are true based on these graphs?Check all that apply.

It is impossible to determine the natural rate of unemployment from these graphs alone.

The natural level of output is 6%.

The natural rate of unemployment is 6%.

Suppose the central bank of the economydecreasesthe money supply.

Show the long-run effects of this policy onbothof the graphs by shifting the appropriate curves.

The long-run effect of the central bank's policy is in the inflation rate, in the unemployment rate, and in real GDP.