Consider the Following Phillips Curve Diagram: (A) the Economy

question 14

Essay

Consider the following Phillips curve diagram: (a) The economy is currently at point A with unemployment of 6% and inflation of 4%.The President has informed you that she is about to undertake an expansionary fiscal policy designed to lower unemployment from its current rate of 6% to 4%.She asks you what will happen in the economy as a result of her policy.Base your answer on the Phillips curve in the above diagram.
(b) How would your answer to (a) above change if you were to take into account potential changes in inflation expectations and their impact on actual inflation?

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Definitions:

Osmosis

The spontaneous movement of solvent molecules through a semi-permeable membrane from a region of lower solute concentration to a region of higher solute concentration.

Salt Water

Water that contains a high concentration of dissolved salts, commonly found in the oceans.

Iodine Potassium Iodide (IKI)

A chemical solution commonly used as a starch indicator in biological and chemical experiments. It changes color in the presence of starch.

Glucose

A simple sugar that is an important energy source in living organisms and is a component of many carbohydrates.