Trying to keep the unemployment rate below the nairu

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Principles of Economics
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Chapter 35 / Exercise 2
Principles of Economics
Mankiw
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full employment level of output and the natural rate of unemployment. Trying to keep the unemployment rate below the NAIRU leads to accelerating inflation rates and cannot be maintained in the long run. Unemployment rates above NAIRU will lead to accelerating deflation that cannot be maintained. The LRPC is vertical because any unemployment rate above or below the NAIRU cannot be maintained. This means that there is no long-run trade-off between inflation and unemployment--that is, no policy can maintain unemployment rates below the NAIRU in the long run. 1.Draw a graph of the LRPC. Be sure to correctly label the axes and label the point at which the LRPC intersects the horizontal axis. 2.What does the slope of the LRPC indicate about the trade-off between the inflation rate and the unemployment rate? 3.Use the graph in problem 1 to show the effect on the LRPC if the natural rate of unemployment decreases. What happens to the LRAS when the natural rate of unemployment decreases? 4
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Principles of Economics
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Chapter 35 / Exercise 2
Principles of Economics
Mankiw
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Phillips Curve Worksheet 4.What change in inflationary expectations is shown by the shift in the short-run Phillips curve (SRPC) from SRPC0 to SRPC1? 5.The LRPC is vertical at the unemployment rate that corresponds to an inflation rate equal to zero. What is the name for this rate of unemployment? 6.At point A on the graph, the actual rate of inflation is (greater than / less than) the expected rate of inflation, which will cause the SRPC to shift to the (right/left). Label point B on the graph where the economy will be in long-run equilibrium after the change in inflationary expectations. Label point C on the graph where the economy will be if policy makers attempt to keep the unemployment rate where it was at point A after the change in inflationary expectations. 5

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