Suppose the current inflation rate and the expected inflation rate are both 3 percent. The current unemployment rate and the natural rate of unemployment are both 4 percent
Use a Phillips curve graph to show the effect on the economy of a severe supply shock. If the Federal Reserve keeps monetary policy unchanged, what will eventually happen to the unemployment rate? Show this on your Phillips curve graph.
The supply shock will shift the short-run Phillips curve up as both the actual inflation rate and the expected inflation rate will increase. The unemployment rate will also increase as the economy moves into recession. If the Fed keeps monetary policy unchanged, the recession will cause workers and firms to lower their expectations of future inflation, and the short-run Phillips curve will shift back down to its previous position. Eventually the unemployment rate will return to the natural rate of 4 percent.
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Mrs. Brown decides to keep $7,000 in her checking account in anticipation of rising interest rates. This is an example of the
A. speculative motive for holding money. B. precautionary motive for holding money. C. commodity demand for money. D. transaction demand for money.
Suppose we observe that a firm's total revenue doesn't change when price and quantity change by the same percentage. Which of the following is a possible value of its price elasticity of demand?
A. 0 B. 0.5 C. 1 D. 2