Question
Assume that the economy of Robsville is currently in long-run equilibrium, with a natural rate of unemployment equal to 6% and an inflation rate of
Assume that the economy of Robsville is currently in long-run equilibrium, with a natural rate of unemployment equal to 6% and an inflation rate of 2%.
a) Draw a correctly labeled graph of the short-run Phillips curve, and label the curve as "SRPC". Indicate the point on the SRPC corresponding to the current unemployment and inflation rates labeled as "R".
b) On your graph in part (a), draw the long-run Phillips curve, and label it as "LRPC".
c) Assume that the government of Robsville enacts a significant tax increase. How will such a tax increase affect unemployment and inflation in the short-run? Explain.
d) Show on your graph in part (a) the new point on the SRPC corresponding to the new result you stated in part (c), labeled as "S".
e) Assume the government takes no fiscal policy action after the tax increase. What will happen to unemployment in the long-run? Explain.
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