The following figure depicts the Phillips curve and the indifference curves of an eco- nomy. This economy has an independent central bank with an inflation target of 2%. Consider an aggregate demand shock that increases unemployment. Explain why the central bank would cut the interest rate to put upward pressure on inflation, in order to bring it back to the target rate.

The following figure depicts the Phillips curve and the indifference curves of an eco- nomy. This economy has an independent central bank with an inflation target of 2%. Consider an aggregate demand shock that increases unemployment. Explain why the central bank would cut the interest rate to put upward pressure on inflation, in order to bring it back to the target rate.

Principles of Economics, 7th Edition (MindTap Course List)

7th Edition

ISBN:9781285165875

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter35: The Short-Run Trade-off Between Inflation And Unemployment

Section: Chapter Questions

Problem 5PA

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