Exhibit 17-5 Short-run and long-run Phillips curve Suppose the government shown in Exhibit 17-5 uses contractionary monetary policy to reduce inflation from 9 to 6 percent. If people have rational expectations, then: A) the economy will remain stuck at point E₁. B) the natural rate will permanently increase to 8 percent. C) unemployment will rise to 8 percent in the short run. D) unemployment will remain at 6 percent as the inflation rate falls.

Question

Quizplus · Accepted Answer

The Answer of Exhibit 17-5 Short-run and long-run Phillips curve Suppose the government shown in Exhibit 17-5 uses contractionary monetary policy to reduce inflation from 9 to 6 percent. If people have rational expectations, then: A) the economy will remain stuck at point E₁. B) the natural rate will permanently increase to 8 percent. C) unemployment will rise to 8 percent in the short run. D) unemployment will remain at 6 percent as the inflation rate falls.

Exhibit 17-5 Short-Run and Long-Run Phillips Curve