Figure 28-5

-Refer to Figure 28-5.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 28-5
 
-Refer to Figure 28-5.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 economy will move along the short-run Phillips curve. Since the Fed's target is 5 percent inflation, but expectations are at 8 percent, unemployment will be higher than the natural rate but not as high as if expectations were at 10 percent. Thus, it will be between 5.5 and 7.5 percent.

Figure 28-5 -Refer to Figure 28-5.Consider the Phillips Curves Depicted in the Curves