Figure 1 shows the Phillips curves. Suppose that the current inflation rate is 5 percent a year
Question:
Figure 1 shows the Phillips curves. Suppose that the current inflation rate is 5 percent a year and the Fed announces that it will slow the money growth rate so that inflation will fall to 2.5 percent a year.
1. If no one believes the Fed and inflation is expected to be 5 percent a year, explain how the Fed’s action will affect inflation and unemployment next year.
2. If everyone believes the Fed, explain the effect of the Fed’s action on inflation and unemployment next year.
3. If no one believes the Fed but the Fed keeps inflation at 2.5 percent for many years, explain the effect of the Fed’s action on inflation and unemployment.
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1 The inflation rate falls and the unemployment rate rises as the economy moves do...View the full answer
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