Consider an economy operating at point A in the figure below. The unemployment rate, the inflation rate, and the expected inflation rate are 5%. Suppose the central bank believes the inflation rate is too high, and it undertakes a policy that decreases the inflation rate to 0%. In the questions below, you are asked to trace the effects of the central bank policy in the short run and the long run. There are five questions that build on one another, so go slowly. Actual and expected Long-run inflation Phillips curve SRPCo SRPC5 (ie = 0%) (ie = 5%) B A 5% 2% C D 0% 3% 4% 5% 7% Unemployment ratePart 1 (1 point) To reduce the ination rate, the Fed would want to pursue v policy. Part 2 (1 point) The central bank changes the money supply using open market operations. The central bank would loanable funds market. Part 3 (1 point) This action by the central bank will cause v 0 See Hint Q See Hint bonds in the 0 See Hint Part 4 (1 point) See Hint The change in interest rates will cause the economy to contract, and the economy moves from in the short run. Part 5 (1 point) See Hint Over time, people adjust their expectations of inflation. Once workers and firms come to expect 0% inflation, the economy moves from