Suppose that the central bank for this economy suddenly and unexpectedly decreases the money supply in an effort to reduce inflation. As a result ofthis unanticipated policy action, actual inflation falls to 3%.On the previous graph, use the black point (plus symbol labeled "B") to illustrate the short-run effects of this policy.Suppose that now, after a period of 3% inflation, households and firms begin to expect that the inflation rate will persist at the level of 3%.On the previous graph, use the purple line (diamond symbol) to draw SRPC₂, the short-run Phillips curve that is consistent with these expectations,assuming that it is parallel to SRPC₂-Finally, using the orange point (square symbol labeled "C"), indicate on the previous graph the new, long-run equilibrium for this economy.The inflation rate at point C isunemployment rate at point A.the inflation rate at point A, and the unemployment rate at point C isWas the central bank able to achieve its goal of lowering inflation?O Yes, the central bank's policy successfully reduced inflation in both the short run and the long run.O Yes, but only in the short run; in the long run, inflation returned to its natural rate.O No, because the central bank cannot affect the inflation rate through monetary policy.theNow, suppose that the public fully anticipates the central bank's decision to decrease the money supply. Assume the public also believes that themonetary authority is firmly committed to carrying out this policy. According to rational expectations theory, when the economy is in long-runequilibrium, a fully anticipated decrease in the money supply will cause the economy to moveprevious Phillips curve graph. In this case, rational expectations theory predicts that the fully anticipated decrease in the money supply will have theimmediate effect ofin the inflation rate andin the unemployment rate.on the If there were many suppliers of diamonds, the price would beIf there were only one supplier of diamonds, the price would beSuppose Russia and South Africa forma cartel.In this case, the price would beevenly, South Africa would produce (per diamond and the quantity sold would beper diamond and the quantity sold would beper diamond and the total quantity sold would bediamonds and earn a profit ofWhy are cartel agreements often not successful?If South Africa increased its production by 1,000 diamonds while Russia stuck to the cartel agreement, South Africa's profitwouldO One party has an incentive to cheat to make more profit.All parties would make more money if everyone increased production,O Different firms experience different costs.diamonds.diamonds.diamonds. If the countries split the market i

The answer provided below has been developed in a clear step by step manner.Step: 1The statement…

this unanticipated policy action, actual inflation falls to 3%. On the previous graph, use the black point (plus symbol labeled "B") to illustrate the short-run effects of this policy. Suppose that now, after a period of 3% inflation, households and firms begin to expect that the inflation rate will persist at the level of 3%. On the previous graph, use the purple line (diamond symbol) to draw SRPC₂, the short-run Phillips curve that is consistent with these expectations, assuming that it is parallel to SRPC₂- Finally, using the orange point (square symbol labeled "C"), indicate on the previous graph the new, long-run equilibrium for this economy. The inflation rate at point Cis unemployment rate at point A. the inflation rate at point A, and the unemployment rate at point Cis Was the central bank able to achieve its goal of lowering inflation? O Yes, the central bank's policy successfully reduced inflation in both the short run and the long run. the

this unanticipated policy action, actual inflation falls to 3%. On the previous graph, use the black point (plus symbol labeled "B") to illustrate the short-run effects of this policy. Suppose that now, after a period of 3% inflation, households and firms begin to expect that the inflation rate will persist at the level of 3%. On the previous graph, use the purple line (diamond symbol) to draw SRPC₂, the short-run Phillips curve that is consistent with these expectations, assuming that it is parallel to SRPC₂- Finally, using the orange point (square symbol labeled "C"), indicate on the previous graph the new, long-run equilibrium for this economy. The inflation rate at point Cis unemployment rate at point A. the inflation rate at point A, and the unemployment rate at point Cis Was the central bank able to achieve its goal of lowering inflation? O Yes, the central bank's policy successfully reduced inflation in both the short run and the long run. the

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The table below reports the actual inflation rate from 2016 to 2020. Complete the table, assuming people form expectations adaptively. Give all answers to two decimals, Actual inflation rate Expected inflation rate Error Year 2016 3% 3% 0% 5.50% a) % b) % 2017 6.00% 5.50% c) 2018 4.00% d) 2.00% 2019 2020 2.00% e) Look back at the table. Assuming people form expectations adaptively, which of the following statements are correct? Choose one or more: OA Monetary policy can reduce unemployment only if the policy is expected. OB. When inflation is increasing from year to year, people tend to overestimate inflation. OC. When inflation is decreasing from year to year, people tend to overestimate inflation. O D. When inflation is decreasing from year to year, people tend to underestimate inflation. OE When inflation is increasing from year to year, people tend to underestimate inflation.
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