Exhibit 17-5 Short-Run and Long-Run Phillips Curve

question 53

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.

---

Definitions:

Fair Value

The estimated market value of an asset or liability, based on current market conditions.

Comparability

A financial accounting principle that enables users to easily evaluate one company's financial statements alongside those of another.

Companies

Business entities formed to engage in commercial, industrial, or professional activities, either for profit or non-profit purposes.

Investment in Bonds

The purchase of bonds with the aim to earn interest income over time and potentially benefit from appreciation in bond value.