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Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509

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BuyFindarrow_forward

Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509
Chapter 22, Problem 1QR
Textbook Problem
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Draw the short-run trade-off between inflation and unemployment. How might the Fed move the economy from one point on this curve to another?

To determine
Short-run Phillips curve.

Explanation of Solution

Figure 1 shows the short-run Phillips curve.

Principles of Macroeconomics (MindTap Course List), Chapter 22, Problem 1QR

In Figure 1, the vertical axis measures the inflation rate and the horizontal axis measures the unemployment rate. The downward sloping curve is the Phillips curve. It shows the short-run tradeoff between inflation rate and unemployment. There is a negative relationship between inflation and unemployment. When the inflation rate is high, then the unemployment rate will be less. The Fed moves the economy from one point on this curve to another by changing the money supply. The increasing money supply leads to an increase in the inflation rate in the economy. An increase in the inflation reduces the unemployment rate.

Economics Concept Introduction

Concept introduction:

Philips curve: Short-run Phillips curve shows the inverse relationship between inflation and unemployment. The short-run Phillips curve is a downward sloping curve.

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