Answered: A worldwide drought has reduced food…

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter17: The Short-run Trade-off Between Inflation And Unemployment

Section: Chapter Questions

Problem 6CQQ

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Question

A worldwide drought has reduced food production. Inflation has increased, unemployment has risen above the natural rate, Pakistani’sare frustrated with their government. Your roommate says, "This economic mess has got to be somebody's fault—probably the Prime Ministeror National Assembly. A year ago, both inflation and unemployment were lower. We need to vote in some policymakers that know how to get rid of this inflation and unemployment." a.If policymakers increase aggregate demand in response to the supply shock,in what direction will the economy move along the new short-run Phillips curve? What will happen to inflation and unemployment?b.Is there a policy that can immediately reduce both inflation and unemployment? Explain.

Definition Definition Relationship between the rate of unemployment and the rate of inflation that shows that the lower the initial rate of unemployment, the greater the rise in wage rate corresponding to a given rise in the rate of unemployment. The Phillips curve assumes that the ratio between prices and nominal wage rates is constant in the short run. Presented graphically, the Phillips curve shows an inverse relationship between the rate of unemployment and the rate of inflation.

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