red Question 915.0%14.0%13.0%12.0%11.0%. 10.0%9.0%8.0%7.0%6.0%5.0%4.0%3.0%2.0%1.0%0.0%Inflation Rate (n)O1,0002,000000's000't5,0005,0007,0008,000000'60cyclical unemployment will beLRAS10,0003 11,000Real GDP (Y)In the short run, the inflation rate will equal12,00012,00013,00013,00014.00014,000000 30percent.AD15,0002009Consider the graph above. It is also in the files folder under the name Short Run andthe Long Run. The graph pertains to a hypothetical country. The central bank in thiscountry (also called the Fed) follows an inflation targeting policy. The current targetinflation rate in 8 percent. The natural rate of unemployment is 5 percent and Okun'salpha is 8.SRAS16,000The oil producing countries unexpectedly and drastically increase oil prices. As a resultthe short run aggregate supply function shifts up by 3 percentage points at each andevery level of real GDP.17,00018,00019,00020,000If the Fed tries to bring the inflation rate back to the target level, thecyclical unemployment will increase topercent.percent andOn the other hand, if the Fed lets go of its inflation targeting policy and instead triesto solve the unemployment problem, the inflation rate will increase topercent. This is what the Fed did in 1973 oil crisis.

The decrease in the AD means that the demand in the economy declines and hence the decline in the…

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Rate (n) 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% LRAS SRAS

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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