Asked by Charlotte George on May 05, 2024
Verified
Suppose that the Fed unexpectedly pursues contractionary monetary policy. What will happen to unemployment in the short run? What will happen to unemployment in the long run? Justify your answer using the Phillips curves.
Contractionary Monetary Policy
A monetary policy strategy used by central banks to reduce inflation and cool an overheated economy by increasing interest rates and reducing the supply of money.
Phillips Curves
A graphical representation showing an inverse relationship between the rate of unemployment and the rate of inflation in an economy.
- Discuss the long-term and short-term impacts of contractionary monetary policy.
Verified Answer
DD
Dorette DjoufackMay 06, 2024
Final Answer :
In the short run, unemployment will rise, because, contractionary policy reduces actual inflation and so moves the economy down along the Phillips curve. In the long run, the economy will return to its natural rate of unemployment as a reduction in expected inflation shifts the short-run Philip curve left.
Learning Objectives
- Discuss the long-term and short-term impacts of contractionary monetary policy.
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