Assume That an Economy Is Initially at the Natural Rate

question 44

Essay

Assume that an economy is initially at the natural rate of unemployment.
a. Use a Phillips curve diagram to illustrate graphically how the inflation rate and unemployment rate change both in the short run and in the long run to an unexpected expansionary monetary policy.
b. Use a Phillips curve diagram to illustrate graphically how the inflation rate and unemployment rate change both in the short run and in the long run to the announcement of a credible plan of expansionary monetary policy when people have rational expectations.

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Definitions:

Loading Dose

An initial higher dose of a drug to quickly achieve a therapeutic level in the body.

Maintenance Dose

The dose of medication needed to maintain a desired level of the drug in the bloodstream after the initial therapeutic effect is achieved.

Heart Failure

A chronic condition where the heart is unable to pump sufficiently to maintain blood flow to meet the body’s needs.

Cefaclor

An antibiotic medication used to treat a wide variety of bacterial infections by stopping the growth of bacteria.