Suppose that the Fed unexpectedly pursues contractionary monetary policy. What will happen to unemployment in the short run? What will happen to unemployment in the long run? Justify your answer using the Phillips curves
In the short run, unemployment will rise, because, contractionary policy reduces actual inflation and so moves the economy down along the Phillips curve. In the long run, the economy will return to its natural rate of unemployment as a reduction in expected inflation shifts the short-run Philip curve left.
You might also like to view...
Under what condition can the U.S. government continue to pay interest on a rising debt without eventually needing to increase the average tax rate?
a. If the national debt grows at the same rate as nominal GDP b. If the nominal interest on the national debt grows faster than nominal GDP c. If the total interest payments on the national debt grow faster than nominal GDP d. If the national debt grows faster than nominal GDP e. If the real interest on the national debt grows faster than real GDP
The statement in a newspaper that "consumer prices rose last month by 1 percent, and if this trend continues, the annual rate of inflation will be 12 percent for the year" is an example of:
A. A normative economic statement B. A positive economic statement C. Microeconomic analysis D. Rational self-interest