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 inflation rate. Assume that the economy 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 short-run effects of this policy. Hint: You may assume that the central bank's move was unanticipated. 6 O 5 SR Phillips Curve 4 O INFLATION RATE (Percent) 3 O O 2 SR Phillips Curve 0 0 2 4 6 8 10 12 UNEMPLOYMENT RATE (Percent)In the short run, an unexpected decrease in the money supply results in T in the inflation rate and T 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 5 .O 4 3 INFLATION RATE (Percent) O 2 1 0 0 2 4 6 8 10 12 UNEMPLOYMENT RATE (Percent)In the long run, the decrease in the money supply results in V in the inflation rate and V in the unemployment rate (relative to the economy's initial equilibrium).The following table shows selected data on unemployment and inflation in the United States between 1961 and 1965. Unemployment Rate Inflation Rate Year (Percent) (Percent) 1961 6.7 1.0 1962 5.5 1.0 1963 5.7 1.3 1964 5.2 1.3 1965 4.5 1.6 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.4.5 4.0 Data Points 3.5 3.0 2.5 INFLATION RATE (Percent) 2.0 1.5 1.0 0.5 0 0 2 3 5 6 7 8 9 UNEMPLOYMENT RATE (Percent)Which of the following statements best describes the relationship between inflation and unemployment in the United States during this time period? O The short-run Phillips curve remained stable. O The short-run Phillips curve shifted to the left after actual inflation was lower than expected. O The short-run Phillips curve shifted to the right after actual inflation was higher than expected. The following graph shows the short-run Phillips curve (SRPC) for the United States in 1961. Drag the dot along the curve, shift the curve, or both to illustrate what happened between 1961 and 1965.O SRPC INFLATION RATE O SRPCThe following graph shows the aggregate demand (AD) and short-run aggregate supply (AS) curves for the United States in 1961. Shift the aggregate demand curve to approximate what happened between 1961 and 1965.