The following graph plots the short-run and long-run Phillips curves (SRPC and LRPC, respectively) for an economy currently experiencing long-run macroeconomic equilibrium at point A, where the natural unemployment rate is 6% and the inflation rate is 8% per year. ? EI 20 LRPC 18 16 14 12 10 INFLATION RATE (Percent) A 00 A SRPC 2 0 5 8 9 10 2 3 6 UNEMPLOYMENT RATE (Percent)10 EI INFLATION RAT 8 6 2 SRPC O 2 3 5 6 8 9 10 UNEMPLOYMENT RATE (Percent) Suppose that the central bank for this economy has decided that inflation is too high and thus wants to decrease the inflation rate by 6 percentage points per year. A reduction in the rate of inflation is known as_ . To reduce inflation from 8% to 2% in the short run, the central bank C- would have to accept an unemployment rate of %. True or False: If people have rational expectations, the sacrifice ratio could be much smaller than suggested by the short-run Phillips curve. True O FalseHomework (Ch 22) The following graph plots the long-run Phillips curve (LRPC) and short-run Phillips curve (SRPC1 ) for an economy currently experiencing long-run equilibrium at point A (grey star symbol). E A-Z 8 SRPC EI LRPC + B 16 SRPC 2 INFLATION RATE (Percent) C N A+ ? UNEMPLOYMENT RATE (Percent) C+ Which of the following is true along SRPC? The expected inflation rate is 5%.Homework (Ch 22) Q Search this course O Which of the following is true along SRPC,? 0 X O The expected inflation rate is 5%. O The actual unemployment rate is 6%. E O The actual inflation rate is 5%. The natural rate of unemployment is 3%. EI Suppose that the central bank for this economy suddenly and unexpectedly decreases the money supply in an effort to reduce inflation. As a result of this unanticipated policy action, actual inflation falls to 3%. On the previous graph, use the black point (plus symbol labeled "B") to illustrate the short-run effects of this policy. Suppose that now, after a period of 3% inflation, households and firms begin to expect that the inflation rate will persist at the level of 3% On the previous graph, use the purple line (diamond symbol) to draw SRPC2, the short-run Phillips curve that is consistent with these expectations, assuming that it is parallel to SRPC. 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 the inflation rate at point A, and the unemployment rate at point C is the C+ unemployment rate at point A. O Was the central bank able to achieve its goal of lowering inflation?Suppose that the central bank for this economy suddenly and unexpectedly decreases the money supply in an effort to reduce inflation. As a result of X this unanticipated policy action, actual inflation falls to 3%. E On the previous graph, use the black point (plus symbol labeled "B") to illustrate the short-run effects of this policy. A-Z Suppose that now, after a period of 3% inflation, households and firms begin to expect that the inflation rate will persist at the level of 3%. EI On the previous graph, use the purple line (diamond symbol) to draw SRPC2, 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, long-run equilibrium for this economy. The inflation rate at point C is the inflation rate at point A, and the unemployment rate at point C is the unemployment rate at point A. Was the central bank able to achieve its goal of lowering inflation? No, because the central bank cannot affect the inflation rate through monetary policy. A ? Yes, but only in the short run; in the long run, inflation returned to its natural rate. Yes, the central bank's policy successfully reduced inflation in both the short run and the long run. Now, suppose that the public fully anticipates the central bank's decision to decrease the money supply. Assume the public also believes that the O monetary authority is firmly committed to carrying out this policy. According to rational expectations theory, when the economy is in long-run on the equilibrium, a fully anticipated decrease in the money supply will cause the economy to move 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 in the inflation rate and in the unemployment rate.The following table presents historical unemployment and inflation data in the United States for the years 1974 through 1978. Unemployment Rate Inflation Rate Year (Percent) (Percent) 1974 5.6 11.0 1975 8.5 9.1 1976 7.7 5.8 EI 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.X 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. NZ (?) 13 Data Points INFLATION RATE (Percent) G 10 11 UNEMPLOYMENT RATE (Percent)Hom X Which of the following statements most accurately describes the relationship between inflation and unemployment in the United States during this time period? O The short-run Phillips curve remained stable. The short-run Phillips curve shifted to the left after actual inflation was lower than expected. A-Z The short-run Phillips curve shifted to the right after actual inflation was higher than expected. EI 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 SRPCShift the curve to illustrate what happened between 1974 and 1978. E ? EI O SRPC INFLATION RATE SRPC ? UNEMPLOYMENT RATE C+ The following graph shows the aggregate demand (AD) and short-run aggregate supply (AS) curves for the United States in 1974. ened between 1974 and 1978.Homework (Ch 22) UNLIVII LUTILIHIMMAIL X E The following graph shows the aggregate demand (AD) and short-run aggregate supply (AS) curves for the United States in 1974. A-Z Shift the aggregate supply curve to approximate what happened between 1974 and 1978. =I (? O AD AS AS PRICE LEVEL ? AD C- OUTPUTHomework (Ch 22) X The following graph plots the short-run Phillips curve for a hypothetical economy. The given point on the graph indicates the initial rates of unemployment and inflation. Assume that the economy is currently in long-run equilibrium. Suppose the central bank of the hypothetical economy decides to increase the money supply. A-Z 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 SR Phillips Curve 3 INFLATION RATE (Percent) N SR Phillips Curve C+ 12 15 18 0 3 9 UNEMPLOYMENT RATE (Percent)In the short run, an unexpected increase in the money supply results in in the inflation rate and in the unemployment rate. A-Z R 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 increase in the money supply. (?) O- O A+ INFLATION RATE (Percent) N 12 15 18 UNEMPLOYMENT RATE (Percent)supply 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 increase in the money -0- INFLATION RATE (Percent) C UNEMPLOYMENT RATE ( Percent) In the long run, the increase in the money supply results in w in the inflation rate and in the unemploye ent rape (relative to the economy's initial equilibrium)X The following graphs plot the long-run equilibrium situation for an economy. The first graph plots the aggregate demand (AD) and long-run aggregate supply (LRAS) curves. The second graph plots the long-run and short-run Phillips curves (LRPC and SRPC, respectively). A-Z LRAS O AD K O LRAS PRICE LEVEL AD 15 18 9 12 0 3 6 OUTPUT (Trillions of dollars)The short-run Phillips curve is line : E Representing the tradeoff between unemployment and inflation At the natural level of output At the natural rate of unemployment Now consider the long-run effects of this policy. Suppose, in particular, that following implementation of the policy, the aggregate demand curve remains at ADB . The long-run equilibrium that would follow such a policy is designated outcome C. Going back to the first graph, place the grey point (star symbol) at outcome C. Because output at point C is the natural level of output, the unemployment rate associated with outcome C is the natural rate of unemployment. Finally, use the green line (triangle symbol) to draw the long-run Phillips curve (LRPC) on the second graph. This line is line: O At the natural level of output Representing the tradeoff between unemployment and inflation C+ At the natural rate of unemployment Save & ContinueHomework (Ch 22) X The following graph plots aggregate demand (AD2027 ) and aggregate supply (AS) for the imaginary country of Patagonia in the year 2027. Suppose the natural level of output in this economy is $6 trillion. A-Z E On the following graph, use the green line (triangle symbol) to plot the long-run aggregate supply (LRAS) curve for this economy. 108 A 107 LRAS AS 106 B Outcome C 105 104 PRICE LEVEL At AD 2027 ADB 103 ADA 102 101 100 16 10 12 14 0 2 8 OUTPUT (Trillions of dollars) ll beHomework (Ch 22) X Economists forecast that if the government takes no action and the economy continues to grow at the current rate, aggregate demand in 2028 will be given by the curve labeled ADA, resulting in the outcome given by point A. If, however, the government pursues an expansionary policy, aggregate demand in 2028 will be given by the curve labeled ADB, resulting in the outcome given by point B. E The following table presents projections for the unemployment rates that would occur at point A and point B. Consider the potential rate of inflation A-Z between 2027 and 2028, depending on whether the economy moves from the initial price level of 102 to the price level at outcome A or the price level at outcome B. EI Complete the table by entering the inflation rate at each potential outcome point. Note: Calculate the inflation rate to two decimal points of precision. Unemployment Rate Inflation Rate A 6% % B 3% % Based on your answers to the preceding parts, use the black line (plus symbol) to draw the short-run Phillips curve (SRPC) for this economy in 2028. (Note: You will not be graded on any changes you make to this graph.) ? O -+ SRPC\f1. Aggregate demand, aggregate supply, and the Phillips curve In the year 2027, aggregate demand and aggregate supply in the imaginary country of Aso-Kuju are represented by the curves AD2027 and AS on the following graph. The price level is currently 102. The graph also shows two potential outcomes for 2028. The first possible aggregate demand curve is given by the curve labeled ADA curve, resulting in the outcome given by point A. The second possible aggregate demand curve is given by the curve A-Z labeled ADB, resulting in the outcome given by point B. EI ? 108 107 AS 106 105 10 PRICE LEVEL 103 ADB 102 ADA C- 101 100 12 14X Suppose the unemployment rate is 6% under one of these two outcomes and 3% under the other, Based on the previous graph, you would expect to be associated with the higher unemployment rate (6%). E If aggregate demand is low in 2028, and the economy is at outcome A, the inflation rate between 2027 and 2028 is Based on your answers to the previous questions, on the following graph use the purple point (diamond symbol) to plot the unemployment rate and EI inflation rate if the economy is at point A. Next, use the green point (triangle symbol) to plot the unemployment rate and inflation rate if the economy is at point B. (As you place these points, dashed drop lines will automatically extend to both axes.) Finally, use the black line (cross symbol) to draw the short-run Phillips curve for this economy in 2028. Note: For graphing pruposes, round the inflation rate under each outcome to the nearest whole percent. For example, round 1.9% to 2.0%. Hint: Hover your cursor over each point after you plot it to make sure you have placed it on the exact coordinate you intended. ? Outcome A A Outcome B ATION RATE (Percent) Phillips Curvethe short-run Phillips curve for this economy in 2028. X Note: For graphing pruposes, round the inflation rate under each outcome to the nearest whole percent. For example, round 1.9% to 2.0%. E Hint: Hover your cursor over each point after you plot it to make sure you have placed it on the exact coordinate you intended. A-7 EI 8 7 Outcome A 6 Outcome B INFLATION RATE (Percent) + W Phillips Curve 2 ? 0 2 5 6 8 C+ UNEMPLOYMENT RATE (Percent) Suppose that the government is considering enacting an expansionary policy in 2027 that would shift aggregate demand in 2028 from ADA to ADB. in the This would cause a the short-run Phillips curve, resulting in in the inflation rate and unemployment rate