Consider the Following Phillips Curve Diagram

question 17

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:

Present Value

The monetary worth at present of a future sequence of payments or a single amount, calculated with a specific interest rate.

Preferred Stock

A type of stock that typically pays fixed dividends and has priority over common stock in the event of a liquidation.

Common Stock

A type of security that represents ownership in a corporation, entitling the holder to a share of the company’s assets and profits.

Dividends

Periodic payments made to shareholders, reflecting a portion of a company's profit.