Figure 28-7
-Refer to Figure 28-7. Consider the Phillips curves depicted in the graph above. The Fed announces its intention to decrease inflation from 10 percent to 5 percent per year, and it succeeds. If expectations of inflation are reduced to 8 percent by the Fed's announcement, the rate of unemployment will be ________ in the short run.

Question

Figure 28-7 
-Refer to Figure 28-7. Consider the Phillips curves depicted in the graph above. The Fed announces its intention to decrease inflation from 10 percent to 5 percent per year, and it succeeds. If expectations of inflation are reduced to 8 percent by the Fed's announcement, the rate of unemployment will be ________ in the short run.

Quizplus · Accepted Answer

In the short run, if inflation expectations are reduced to 8 percent, the actual inflation rate is lower than expected, leading to a temporary decrease in unemployment. However, since expectations are not fully adjusted to the new inflation rate, unemployment will be between the natural rate (5.5%) and the rate corresponding to the initial inflation rate (7.5%).

Figure 28-7 -Refer to Figure 28-7. Consider the Phillips Curves Depicted in Curves