Problems & Applications (Ch 22) 6. Expectations and the Phillips curve The follo

Question

Problems & Applications (Ch 22) 6. Expectations and the Phillips curve The following graph shows an aconomy in long-run equlibrium at point A (orey star symbol). The downward-sloping curve labeled SRPC, is the short-run Phillips curve passing through point A The vertical line is the long-run Phillips curve (LRPC) LRPC UNEMPLOYMENT RATE (Percent Which of the following is true along SRPC The natural rate of unemployment is 2%. The actual inflation rate is 2%. The expected inflation rate is 2%. O The actual unemployment rate is 1%. Suppose that the Fed suddenly and unexpectedly increases the money supply in an effort to reduce unemployment. As a resuit of this unanticipated action, actual inflation rises to 5%.

Explanation / Answer

True statements

The actual inflation rate is 2%

The expected inflation rate is 2%

From point A we see actual inflation is 2% and when the economy is the at long run equilibrium, actual inflation is equal to expected inflation. So expected inflation is 2%

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