rigure 4 Inflation (percent per year) rate Long-run Phillips curve 8 Short-run P

Question

rigure 4 Inflation (percent per year) rate Long-run Phillips curve 8 Short-run Phillips curve 3.8% 5 6 Unemployment rate (percent) Refer to Figure 2. Suppose the economy is at point 8. If the Fed increases the money supply so that inflation increases, the economy will in the short run, holding all else constant. O A) eventually move to point A B) stay at point B C) eventually move to point C D) move to point A and then back to point 8 O O Save Question 37 (1 point) Refer to Figure 2. Suppose the economy is at point C. If the Fed decreases the money supply so that infiation falls, the economy will in the long run, holding all else constant. O A) eventually move to point A O B) eventually move to point 8 O C) stay at point C D) move to point A and then back to point B

Explanation / Answer

1) Suppose the economy is at point B. If the FED increases the money supply so that inflation increases, the economy will _______ in the short run, holding all else constant

Solution: eventually move to point A

Explanation: Actual inflation and expected inflation are the same, thus eventually move to point A

2) Suppose the economy is at point C. If the FED decreases the money supply so that inflation falls, the economy will _______ in the long run, holding all else constant

Solution: eventually move to point A

Explanation: In the long-run there is no trade-off between inflation and unemployment

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