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:

Electrically Charged

Having a property that causes it to attract or repel other electrically charged objects due to the presence of electric charges on its surface.

At Rest

A state in which one is not engaged in physical activity or exertion, often associated with the body’s normal functions at a basal metabolic rate.

Neuron

A specialized cell transmitting nerve impulses; a fundamental unit of the brain and nervous system.

Axon

An elongated, thin extension of a neuron, or nerve cell, that generally transports electrical signals from the cell body of the neuron.