# Hw 12 Solution - Econ 201 HW 12 40 1(a If the inflation...

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Econ 201 HW 12 40 1. (a) If the inflation rate increases in the short run, the unemployment rate will _ decrease _ in the short run. (b) If the inflation rate increases in the long run, the unemployment rate will _not change_ in the long run. (2) 2. Which of these represents a short run Phillips curve and which is the long run? Explain. (2) A is the short run Phillips curve. There is a trade-off between inflation and unemployment. B is the long run Phillips curve. Unemployment will remain at its natural rate regardless of inflation. 3. Assume the Phillips curve below applies to the economy in the short run. (13) a) If the economy is currently at point B, the inflation rate is _ 5% _ and the unemployment rate is _ 1% __. b) If the central bank wants to move the economy from point B to point A, it will reduce inflation by _ 1.5%__ but increase unemployment by _ 1% __. c) The central bank should increase/ decrease the money supply. It should buy/ sell government bonds, raise /lower reserve requirements, and raise /lower interest rates.

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d) The economy will experience deflation when the unemployment rate rises above : 9% e) Assume the natural rate of unemployment in this economy is 4%. Draw the long run Phillips curve on the graph. f) If the natural rate of unemployment is 4%, and the economy is currently at point A. is the economy experiencing an inflationary gap, a recessionary gap, or neither? Explain. Inflationary gap – Inflation is greater and unemployment lower than at full employment.
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