8. Monetary policy 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 economy is currently in long-run equilibrium. Suppose the central bank of the hypothetical economy decides to increase the money supply. On one following graph, shift me curve or drag one blue point along the curve, or do both, in Show me shortrun e'ecrs of bills policy. Hint: You may assume that the central bank's move was unanticipated. O 5 SR Phillips Curve O 3 INFLATION RATE (Percent) SR Phillips Curve 2 3 5 UNEMPLOYMENT RATE (Percent) In the short run, an unexpected increase in the money supply results in in the inflation rate and 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 increase in the money supply. INFLATION RATE (Percent) 3 2 2 5 UNEMPLOYMENT RATE (Percent) In the long run, the increase in the money supply results in in the inflation rate and in the unemployment rate (relative to the economy's initial equilibrium).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). LRAS O AD LRAS PRICE LEVEL AD 2 3 5 OUTPUT (Trillions of dollars)(? LRPC O SRPC LRPC INFLATION RATE SRPC 0 2 4 6 8 10 12 UNEMPLOYMENT RATE (Percent)Which of the following statements are true based on these graphs? Check all that apply. The natural level of output is 6%. It is impossible to determine the natural rate of unemployment from these graphs alone. The natural rate of unemployment is 6%. Suppose the central bank of the economy decreases the money supply. Show the long-run effects of this policy on both of 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