MACROECON.EBK+MYECOLAB+STUDENT PACKET>I
MACROECON.EBK+MYECOLAB+STUDENT PACKET>I
7th Edition
ISBN: 9781323914342
Author: HUBBARD/LAPOIN
Publisher: PEARSON C
Question
Chapter 17, Problem 17.1.2RQ
To determine

The actions of FED to move from high unemployment and lower inflation to low unemployment and high inflation point on Phillips curve.

Expert Solution & Answer
Check Mark

Explanation of Solution

The Phillips curve is used by the economists to depict the short-run relation between the inflation rate and the unemployment rate in an economy. The inflation rate and the unemployment rate are the two evils which every economy tries to minimize in the short-run as well as in the long-run. But, the government cannot reduce them both at the same time. When they focus on reducing the unemployment rate, it will lead to an increase in the inflation rate and vice versa. This trade-off between the inflation rate and unemployment is explained with the help of the Phillips curve.

In order to eradicate unemployment, the FED would like to take the expansionary monetary policy which injects new money to the economy with which the per capita income of the people will increase and induce the consumption and production in the economy; this will in turn increase the demand for labor and reduce the rate of unemployment in the economy. But at the same time, the increase in the demand will also lead to an increase in the price level in the economy.

Thus, the expansionary monetary policy by the FED increases the aggregate demand of the economy, which will cause the real GDP to increase along with the price level and lowering the rate of unemployment in the economy. So in order to move from a point on Phillips curve which represents higher unemployment rate with lower inflation rate to a point where the unemployment rate is lower and the inflation rate is higher, the FED should undertake the expansionary monetary policy.

Economics Concept Introduction

Concept introduction:

Phillips curve: Phillips curve shows the relationship and trade-off between the inflation rate and unemployment rate in an economy during the short-run period.

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Students have asked these similar questions
In March and April 1980, inflation in the United States peaked at 14.6 percent. What did then-Fed chairman Volcker elect to do? What was the impact of his policy?
Why are inflation expectations so important to modern monetary policy? What are several ways that central banks try to manage inflation expectations?  
A movement to the right along a given short-run Phillips curve could be caused by   a. contractionary monetary policy, but not an increase in the natural rate of unemployment.   b. expansionary monetary policy, but not an increase in the natural rate of unemployment.   c. an increase in the natural rate of unemployment or a contractionary monetary policy.   d. an increase in the natural rate of unemployment or expansionary monetary policy.
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