Using the Phillips curves, what are the short-run and long-run effects of a decrease in the inflation rate?
What will be an ideal response?
In the short run, there is first a downward movement along the short-run Phillips curve as the inflation rate falls and the unemployment rate increases. In the long run, however, the expected inflation rate falls and the short-run Phillips curve shifts downward. Therefore in the long run the inflation rate remains low and the unemployment rate returns to the natural unemployment rate.
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An increase in the price of good X causes the demand for good Y to shift inward. One can conclude that X and Y are:
a. complements. b. substitutes. c. unrelated goods. d. normal goods. e. exceptions to the law of demand.
Which of the following will lower interest rates in the short run?
a. an increase in reserve requirements b. open market sales by the Fed c. a decrease in real GDP d. an increase in the price level