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Unformatted text preview: However, because expected inflation also falls, there is an immediate downward jump in the price level . Analytical Problem 7.4: The key to this problem is to remember that: ) , , ( m e i r Y L M P + = a.) A temporary increase in G makes r increase, and so prices rise . b.) A reduction in e causes prices to fall . c.) A temporary increase in labor supply makes Y increase temporarily, which also causes r to fall. L rises and so prices fall . d.) An increase in m i causes L to rise, and so prices fall . 2...
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- Winter '06