Author Question: If the Fed increases the inflation rate in the short run before people's expected inflation changes, ... (Read 102 times)

mrsjacobs44 · **on:** Jun 29, 2018

If the Fed increases the inflation rate in the short run before people's expected inflation changes, what occurs? What happens in the long run?

What will be an ideal response?

Question 2

Prices help coordinate all phases of production so producers have the right quantities of resources they need, in the right place, to operate.

Indicate whether the statement is true or false

mcomstock09 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

Increasing the inflation rate with no change in the expected inflation rate moves the economy along its short-run Phillips curve. The inflation rate rises and the unemployment rate falls. The short-run Phillips curve does not shift. In the long run, however, people will revise their expected inflation rate upward to match the higher inflation. As this revision occurs, the short-run Phillips curve shifts upward. The unemployment rate and the inflation rate both increase. In the long run, when the higher inflation rate is fully expected, the short-run Phillips curve stops shifting upward. At this point, the unemployment rate has risen from its initial fall so that it now equals the natural unemployment rate. The inflation rate is permanently higher.

Answer to Question 2

TRUE