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 the assumptions of the rational expectations school hold true, and the Fed's announcement is credible, 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 the assumptions of the rational expectations school hold true, and the Fed's announcement is credible, the rate of unemployment will be ________ in the short run.

Quizplus · Accepted Answer

If the Fed's announcement is credible and the assumptions of rational expectations hold, people will adjust their expectations immediately, and the unemployment rate will remain at the natural rate, which is 5.5 percent.

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