Figure 17-2
-Refer to Figure 17-2.Suppose the economy is at point A.The Fed uses expansionary monetary policy to lower the unemployment rate permanently below the level associated with A.Which of the following will occur?

Question

Figure 17-2 
-Refer to Figure 17-2.Suppose the economy is at point A.The Fed uses expansionary monetary policy to lower the unemployment rate permanently below the level associated with A.Which of the following will occur?

Quizplus · Accepted Answer

According to the Phillips curve, a permanent reduction in unemployment below the natural rate will lead to an increase in inflation. Therefore, the economy will experience accelerating inflation in the long run as a result of the Fed's expansionary monetary policy. Choice B is incorrect because lower unemployment will put upward pressure on wages and prices, leading to higher inflationary expectations. Choice C is incorrect because the policy is aimed at permanently reducing unemployment below the natural rate, so unemployment cannot rise above it in the long run. Choice D is also incorrect for the same reason stated in choice C.

Figure 17-2 -Refer to Figure 17-2.Suppose the Economy Is at Point A.The