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Suppose that an economy currently has an unemployment rate of 7%, an inflation rate of 4% and an expected inflation rate of 4% as well.
Suppose that an economy currently has an unemployment rate of 7%, an inflation rate of 4% and an expected inflation rate of 4% as well. Suppose that the slope of the short-run Phillips curve is -1/2 (unemployment is on the horizontal axis and inflation is on the vertical axis) and the expected inflation rate stays at 4%. If a central bank wants to lower unemployment rate to 5%, inflation would have to
(a) be decreased to 0%.
(b) be increased to 6%.
(c) be increased to 8%.
(d) stay put.
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