8. Monetary |:|olil:|;|r and the Phillips curve The following graph shows the current short-run Phillips curve for a hypothetical economy; the point on the graph shows the initial unemployment rate and ination rate. Assume that the eoonomy is currently in long-run equilibrium. Suppose the central bank of the hypothetical economy decides to decrease the money supply. On the following graph, shift the curve or drag the blue point along the curve, or do both, to show the shortrun effects of this policy. Hint: You may assume that the central bank's move was unanticipated. a. o 5 SR Phillips Curve :2- ' . I: I g 4 a & LL| L2 3 _ _ _ _ _ _ _ _ o: 2 g I ,_ 5 2 I LL I 2 - I SR illips Curve I 1 I I I n n 3 a n 12 15 13 UNEMPLOYMENT RATE (Percent) In the short run. an unexpected decrease in the money supply results in V in the ination rate and V in the unemployment rate. On the following graph, shift the curve or drag the blue point along the curve, or do both, to show the long-run effects of the decrease in the money supply. 6 O 3 INFLATION RATE (Percent) O 0 3 6 9 12 15 18 UNEMPLOYMENT RATE (Percent) In the long run, the decrease in the money supply results in in the inflation rate and in the unemployment rate (relative to the economy's initial equilibrium)