LRPC 4% 3% PC2 PC1 0 tl 3% 5% Figure 1: Phillips Curves 2. For this question, re

Question

LRPC 4% 3% PC2 PC1 0 tl 3% 5% Figure 1: Phillips Curves 2. For this question, refer to figure 1. The Phillips Curve is currently given by PCi, and the unemployment rate is current 5%. If the Fed engages in an open market purchase to reduce the unemployment rate to 3%, in the short run, this will lead to what inflation rate? 3. For this question, refer to figure 1. The Phillips Curve is currently given by PCt. and the unemployment rate is current 5%. If the Fed attempts to maintain unemployment at 3% what will happen to the Phillips curve? Explain why.

Explanation / Answer

2) when the current unemployment rate is 5% and fed wants to reduce unemployment rate to 3% by open market purchases it will lead to higher inflation rate to 3% . Because when fed purchases in open market, then the supply of money increases which reduced interest rate and stimulate aggregate demand and increase price level and unemployment rate decreases. Thus the inflation rate in short run reached to 3%.

3) if fed wants to maintain unemployment rate at 3%, then the long run Phillips Curve will shift to the left and higher inflation rate. Because, when fed want to maintain the unemployment rate, then it have to continuously increase the aggregate demand in the economy and thus in long run the price level increases .

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