Use the following to answer question 118:
-(Figure: Expected Inflation and the Short-Run Phillips Curve) SRPC₀ is the Phillips curve with an expected inflation rate of zero; SRPC₂ is the Phillips curve with an expected inflation rate of 2%. Refer to Figure: Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an unemployment rate of 6%, inflation of 2%, and an expectation of 2% future inflation. If the central bank decreases the money supply such that aggregate demand shifts to the left and unemployment rises to 8%, then inflation will:

Question

Use the following to answer question 118:

-(Figure: Expected Inflation and the Short-Run Phillips Curve) SRPC₀ is the Phillips curve with an expected inflation rate of zero; SRPC₂ is the Phillips curve with an expected inflation rate of 2%. Refer to Figure: Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an unemployment rate of 6%, inflation of 2%, and an expectation of 2% future inflation. If the central bank decreases the money supply such that aggregate demand shifts to the left and unemployment rises to 8%, then inflation will:

Quizplus · Accepted Answer

When the central bank decreases the money supply, aggregate demand decreases, leading to higher unemployment and lower inflation. Since the economy starts with an inflation rate of 2% and an expectation of 2% future inflation, a shift to higher unemployment (8%) due to reduced aggregate demand would typically result in a lower inflation rate, moving along the Phillips curve associated with the expected inflation rate of 2%. However, the specific outcome (falling to zero) cannot be determined without the actual Phillips curve graph. The principle, though, is that inflation would decrease, not increase or remain unchanged, given the described economic conditions.

Use the Following to Answer Question 118