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 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 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 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

According to the rational expectations school, if the Fed's announcement to decrease inflation is credible, people will adjust their expectations immediately. This means the economy can move to the lower inflation rate without experiencing the temporary increase in unemployment depicted by the traditional Phillips curve. Therefore, the unemployment rate will remain at the natural rate, which is depicted as 5.5 percent in this scenario.

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