Shift the graphs and answer questions, and no explanation needed.

4.

4. Monetary policy and the Phillips curve The following graph shows the current shortrun 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 longrun 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. /'\\ l\\:?//i G _ O 5 " SR Phillips Curve 2 O a E, .U_J 3 ' 0 z 9 ' 5 2 L E SR Phillips Curve 1 __ 0 l l . l | i o 3 6 9 12 15 1e UNEMPLOYMENT RATE (Percent) In the short run, an unexpected decrease in the money supply results in V in the inflation 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 short-run effects of this policy. Hint: You may assume that the central bank's move was unanticipated. 6 _ O 5 " SR Phillips Curve 5: O '5 E, e e 3 ' 0 z 9 I S 2 LI. 2 _ SR Phillips Curve 1 _ 0 l l I l | i o 3 6 9 12 15 18 UNEMPLOYMENT RATE (Percent) In the short run, an unexpected decrease in the money supply results in V in the inflation rate and V in the unemployment rate. a decrease an increase On the following graph, shift the curve or drag the blue point along the c h, to show the long-run effects of the decrease in the money supply. no change 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 5: O '5 E, e e 3 ' 0 z 9 I S 2 LI. 2 _ SR Phillips Curve 1 _ 0 l l I l | i o 3 6 9 12 15 18 UNEMPLOYMENT RATE (Percent) In the short run, an unexpected decrease in the money supply results in V in the inflation rate and V in the unemployment rate. an increase a decrease On the following graph, shift the curve or drag the blue point along the curve, or do both, to show the long-run e supply. no change 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. N (3' 6 _ O 5 a 0 g 4 a 5 .U_J E 3 0 z 9 ' 5 2 L E 1 O 1llullu o 3 6 9 12 15 18 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). 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 9 0 g 4 a 9., .U_J 35 3 0 2 Q ' 5 2 L E 1 o no change 0 3 6 9 12 15 UNEMPLOYMENT RATE (Percent) a decrease an increase 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). 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 9 0 g 4 a 9., .e 35 3 0 2 Q ' 5 2 L E 1 O 1llullu a decrease o 3 6 9 12 15 1e UNEMPLOYMENT RATE (Percent) no change an increase 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). 5. The Phillips curve in the late 20th century The following table shows selected data on unemployment and inflation in the United States between 1974 and 1978. Unemployment Rate Inflation Rate Year (Percent) (Percent) 1974 5.6 1 1.0 1975 8.5 9.1 1976 7.7 5.8 1977 7.1 6. 5 1978 6.1 7.6 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. 13 12 Data Points 11 10 INFLATION RATE (Percent) Co 2 3 5 6 8 10 11 UNEMPLOYMENT RATE (Percent)Which of the following statements best describes the relationship between inflation and unemployment in the United States during this time period? 0 The shortrun Phillips curve shifted to the left after actual inflation was lower than expected. 0 The short-run Phillips curve remained stable. 0 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 1974. Shift the curve to illustrate what happened between 1974 and 1978. O SRPC INFLATION RATE SRPC UNEMPLOYMENT RATEThe following graph shows the aggregate demand (AD) and shortrun aggregate supply (AS) curves for the United States in 1974. Shift the aggregate supply curve to approximate what happened between 1974 and 1978. /_\\ [\\32 AD AS U AS PRICE LEVEL AD OUTPUT 6. Expectations and the Phillips curve The following graph shows an economy in long-run equilibrium at point A (grey star symbol). The vertical line is the long-run Phillips curve (LRPC). The downward-sloping curve labeled SRPC, is the short-run Phillips curve passing through point A. SRPC, LRPC B 6 A SRPC2 INFLATION RATE (Percent) O C N 0 1 2 3 4 5 6 7 8 UNEMPLOYMENT RATE (Percent)Which of the following is true along SRPCl? O The expected inflation rate is 5%. O The actual inflation rate is 5%. O The natural rate of unemployment is 3%. O The actual unemployment rate is 6%. Suppose that the Fed suddenly and unexpectedly decreases the money supply in an effort to reduce inflation. As a result of this unanticipated action, actual inflation falls to 3%. On the previous graph, use the black point (plus symbol labeled "3\") to illustrate the short-run effects of this policy. Now, suppose thatafter a period of 3% inflationhouseholds and firms begin to expect that the inflation rate will continue to be 3%. On the previous graph, use the purple line (diamond symbol) to draw SRPCg, the short-run Phillips curve that is consistent with these expectations, assuming that it is parallel to SRPCI . Finally, using the orange point (square symbol labeled "C"), indicate on the previous graph the new, long-run equilibrium for this economy. The inflation rate at point C is Y the inflation rate at point A, and the unemployment rate at point C is V the unemployment rate at point A. Which of the following is true along SRPCl? O The expected inflation rate is 5%. O The actual inflation rate is 5%. O The natural rate of unemployment is 3%. O The actual unemployment rate is 6%. Suppose that the Fed suddenly and unexpectedly decreases the money supply in an effort to reduce inflation. As a result of this unanticipated action, actual inflation falls to 3%. On the previous graph, use the black point (plus symbol labeled "8") to illustrate the short-run effects of this policy. Now, suppose thatafter a period of 3% inflationhouseholds and firms begin to expect that the inflation rate will continue to be 3%. On the previous graph, use the purple line (diamond symbol) to draw SRPCZ, the short-run Phillips curve that is consistent with these expectations, assuming that it is parallel to SRPC1 . Finally, using the orange point (square symbol labeled "C"), indicate on the previous graph the new, longrun equilibrium for this economy. The inflation rate at point C is V the inflation rate at point A, and the unemployment rate at point C is V the unemployment rate at point A lower than Was the Fed able to achieve it the same as g inflation? 0 Yes, but only in the higher than - long run, inflation returned to its natural rate. Which of the following is true along SRPCl? O The expected inflation rate is 5%. O The actual inflation rate is 5%. O The natural rate of unemployment is 3%. O The actual unemployment rate is 6%. Suppose that the Fed suddenly and unexpectedly decreases the money supply in an effort to reduce inflation. As a result of this unanticipated action, actual inflation falls to 3%. On the previous graph, use the black point (plus symbol labeled "3") to illustrate the short-run effects of this policy. Now, suppose thatafter a period of 3% inflationhouseholds and firms begin to expect that the inflation rate will continue to be 3%. On the previous graph, use the purple line (diamond symbol) to draw SRPCZ, the short-run Phillips curve that is consistent with these expectations, assuming that it is parallel to SRPC1 . Finally, using the orange point (square symbol labeled "C"), indicate on the previous graph the new, longrun equilibrium for this economy. The inflation rate at point C is V the inflation rate at point A, and the unemployment rate at point C is V the unemployment rate at point A. higher than Was the Fed able to achieve its goal of lowering inflation? lower than 0 Yes, but only in the short run; in the long run, inflation returned to its natural rate. the same as Was the Fed able to achieve its goal of lowering inflation? 0 Yes, but only in the short run; in the long run, inflation returned to its natural rate. O No, because the Fed cannot affect the inflation rate through monetary policy. O Yes, the Fed's policy successfully reduced inflation in both the short run and the long run. Now, suppose that the public fully anticipates the Fed's decision to decrease the money supply. Assume the public also believes that the Fed is rmly committed to carrying out this policy. According to rational expectations theory, when the economy is in longrun equilibrium, a fully anticipated decrease in the money supply will cause the economy to move V on the previous Phillips curve graph. In this case, rational expectations theory predicts that the fully anticipated decrease in the money supply will have the immediate effect of V in the inflation rate and V in the unemployment rate. Was the Fed able to achieve its goal of lowering inflation? 0 Yes, but only in the short run; in the long run, inflati from A to B and then to C O No, because the Fed cannot affect the inflation rate t from A to B and then back to A 0 Yes, the Fed's policy successfully reduced inflation in from A to B to C and then back to B directly from A to C Now, suppose that the public fully anticipates the Fed's decisio e the public also believes that the Fed is rmly from A to B permanently committed to carrying out this policy. According to rational exp in long-run equilibrium, a fully anticipated decrease in the money supply will cause the economy to move V on the previous Phillips curve graph. In this case, rational expectations theory predicts that the fully anticipated decrease in the money supply will have the immediate effect of V in the inflation rate and V in the unemployment rate. Was the Fed able to achieve its goal of lowering inflation? 0 Yes, but only in the short run; in the long run, inflation returned to its natural rate. O No, because the Fed cannot affect the inflation rate through monetary policy. 0 Yes, the Fed's policy successfully reduced inflation in both the short run and the long run. no chan e g hat the public fully anticipates the Fed's decision to decrease the money supply. Assume the public also believes that the Fed is rmly a decrease arrying out this policy. According to rational expectations theory, when the economy is in longrun equilibrium, a fully anticipated money supply will cause the economy to move V on the previous Phillips curve graph. In an increase al expectations theory predicts that the fully anticipated decrease in the money supply will have the immediate effect of V in the inflation rate and V in the unemployment rate. Was the Fed able to achieve its goal of lowering inflation? 0 Yes, but only in the short run; in the long run, inflation returned to its natural rate. O No, because the Fed cannot affect the inflation rate through monetary policy. 0 Yes, the Fed's policy successfully reduced inflation in both the short run and the long run. no change Now, suppose that the public fully anticipa- -cision to decrease the money supply. Assume the public also believes that the Fed is rmly committed to carrying out this policy. Acco a decrease -| expectations theory, when the economy is in longrun equilibrium, a fully anticipated decrease in the money supply will cause th ove V on the previous Phillips curve graph. In an increase this case, rational expectations theory pre- Ily anticipated decrease in the money supply will have the immediate effect of V in the inflation rate and V in the unemployment rate