Figure 17-7
-Refer to Figure 17-7.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 17-7 
-Refer to Figure 17-7.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

If the Fed announces its intention to decrease inflation and succeeds, but expectations of inflation are only reduced to 8 percent, the economy would move along the short-run Phillips curve associated with 8 percent inflation expectations. This would result in a short-run unemployment rate that is higher than the original (associated with lower inflation expectations) but not as high as it would be without any change in expectations. Therefore, the unemployment rate would be between the rates associated with the original and fully adjusted expectations, which are 5.5 percent and 7.5 percent, respectively.

Figure 17-7 -Refer to Figure 17-7.Consider the Phillips Curves Depicted in the Depicted