Question

Suppose the economy is in a long-run equilibrium, as shown on the following graph. Now suppose a wave of business pessimism reduces aggregate demand. On the following graph, shirt a curve or adjust the point to reflect the short-run effect of business pessimism. LRPC Inflation Rate SRPC Unemployment Rate

Answer 1

ANSWER 1 -- IN SHORT RUN THERE WILL BE MOVEMENT ALONG THE SHORT RUN SUPPLY CRVE THUS DECREASING THE INFLATION AND INCREASING UNEMPLOYMENT RATE. THUS INFLATION DECREASES FROM i to i1 AND UNEMPLOYMENT RATE INCREASES FROM u to u1. IF THE FED TAKES EXPANSIONARY MONETARY POLICY IT WILL NOT RETURN THE ECONOMY TO ITS ORGINAL INFLATION AND UNEMPLOYMENT RATE

SRPC unemployment rete

ANSWER 2 -- IN SHORT RUN AN OIL SHOCK OR INCREASE IN PRICE OF OIL WILL SHIFT THE SHORT RUN PHILIPS CURVE TOWARDS RIGHT THUS INCREASING THE INFLATION FROM i to i1 AND UNEMPLOYMENT RATE INCREASES FROM u to u1.

LRPC inflation unemployment rete

ANSWER 3 --- STATEMENT IS FALSE AS WHEN THE FED TAKES UP EXPANSIONARY MONETARY POLICY IT CANNOT BRING BACK TO THE ORGINAL INFLATION.