If expectations are adaptive, how will the economy adjust to a new long-run equilibrium in response to contractionary monetary policy? Support your answer with a graph of the Phillips curve
What will be an ideal response?
Contractionary monetary policy reduces the inflation rate. With adaptive expectations, workers and firms will overestimate inflation, resulting in an increase in the real wage and an increase in the unemployment rate (move from A to B on the short-run Phillips curve below). Eventually, workers and firms will adjust to the fact that inflation is lower, shifting the short-run Phillips curve down and reducing the unemployment rate to its natural rate (move from B to C in the graph below).
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The focus of firm decisions in the short run is primarily on
A) variable inputs. B) capital investment. C) plant size. D) economies of scale.
Holding everything else constant, a decrease in the price of bicycles will result in
A) a decrease in the quantity of bicycles demanded. B) an increase in the demand for bicycles. C) a decrease in the supply of bicycles. D) an increase in the quantity of bicycles demanded.