VPC Inflation PC = 9 MR PC = 8 8. t' .y PC = 7 7 W PC = 6 6. Output Figure 9 The MR and PC curves Figure 9 shows the impact of a supply shock to the economy which has increased inflation to 9% a year (point A) and this level of inflation becomes embedded as the expected rate of inflation, so the economy is located on the PC curve, PC = 9. The central bank's monetary rule is shown by the curve labelled MR and the inflation target that it wants to return to is 2% a year (point B). As a first step, the central bank raises interest rates to reduce aggregate demand moving the economy to point t in Figure 9. Which one of the labelled points does the economy move to next? Select one: Ох O w O z Oy 5. 4. 3. 2. 1. 96

VPC Inflation PC = 9 MR PC = 8 8. t' .y PC = 7 7 W PC = 6 6. Output Figure 9 The MR and PC curves Figure 9 shows the impact of a supply shock to the economy which has increased inflation to 9% a year (point A) and this level of inflation becomes embedded as the expected rate of inflation, so the economy is located on the PC curve, PC = 9. The central bank's monetary rule is shown by the curve labelled MR and the inflation target that it wants to return to is 2% a year (point B). As a first step, the central bank raises interest rates to reduce aggregate demand moving the economy to point t in Figure 9. Which one of the labelled points does the economy move to next? Select one: Ох O w O z Oy 5. 4. 3. 2. 1. 96

Economics:

10th Edition

ISBN:9781285859460

Author:BOYES, William

Publisher:BOYES, William

Chapter14: Macroeconomic Policy: Tradeoffs, Expectations, Credibility, And Sources Of Business Cycles

Section: Chapter Questions

Problem 8E

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