Examine the equilibrium below. Potential GDP equals 14. Now suppose that an increase in inflationary expectations...

Transcribed Image Text:

Examine the equilibrium below. Potential GDP equals 14. Now suppose that an increase in inflationary expectations raises the inflation rate by 2 percentage points. After this change, what will the inflation rate be, in the short run and in the long run? Assume that the Fed never reacts to GDP gaps. 7 6 сл inflation rate (π) 4 3 2 1 0 5 10 15 GDP (Y) 20 AD 25 IA 30 O Short run 7.5%, long run 5.5% O Short run 5.5%, long run 5.5% O Short run 7.5%, long run 7.5% O Short run 5.5%, long run 7.5% Examine the equilibrium below. Potential GDP equals 14. Now suppose that an increase in inflationary expectations raises the inflation rate by 2 percentage points. After this change, what will the inflation rate be, in the short run and in the long run? Assume that the Fed never reacts to GDP gaps. 7 6 сл inflation rate (π) 4 3 2 1 0 5 10 15 GDP (Y) 20 AD 25 IA 30 O Short run 7.5%, long run 5.5% O Short run 5.5%, long run 5.5% O Short run 7.5%, long run 7.5% O Short run 5.5%, long run 7.5%

Answer rating: 100% (QA)

The detailed answer for the above question is provided be... View the full answer