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Unformatted text preview: 11-23-09Unemployment & Inflation Trade-off-Phillips curve: curve showing the SR relationship between UE rate & inflation rate-**fig. 28.1**The Short Run & Long Run Phillips Curves-How does a vertical LR Phillips curve affect monetary policy?o**fig. 28.7**oUnderstanding there exist levels of low UE that will increase inflation, & levels of high UE that decrease inflation, there will be an UE level that wont create any pressure on inflationoNonaccelerating inflation rate of UE (NARIU): UE rate where it has no tendency to increase/decrease inflation rateRational Expectations of the Inflation Rate-Earlier it was put forth that SR PC demonstrated an inflationUE tradeoff-This suggest a possibility for buying reduced UE w/inflationary monetary policy-Suppose workers (especially labor groups) & businesses incorporate all available info into their decision process; these players understand econ. policy actions & have a reasonable ability to foretell pd. Of inflation-Would they not become less susceptible to unanticipated inflation?Rational Expectations-By incorporating rational expectationsthat isexpectations formed by using all available info about an econ. variablethe bump from inflation may disappear-One might imagine if any central bank practiced this policy for long, the policy would become fully anticipated-Reality is likely between the two scenarios-**fig. 28.8**Rational Expectations of Inflation & Monetary Policy...
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