Exhibit 17-5 Short-Run and Long-Run Phillips Curve Suppose the Government

question 85

Multiple Choice

Exhibit 17-5 Short-run and long-run Phillips curve Suppose the government shown in Exhibit 17-5 uses contractionary monetary policy to reduce inflation from 9 to 6 percent. If people have rational expectations, then:

• A)the economy will remain stuck at point E₁.
• B)the natural rate will permanently increase to 8 percent.
• C)unemployment will rise to 8 percent in the short run.
• D)unemployment will remain at 6 percent as the inflation rate falls.

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