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Inflation Rate (П) 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 0 1,000 15.0% 14.0% LRAS 13.0% 12.0% 11.0% 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 Real GDP (Y) AD 10,000 11,000 12,000 13,000 14,000 15,000 16,000 17,000 18,000 19,000 20,000 Consider the graph above. It is also in the files folder under the name Short Run and the Long Run. The graph pertains to a hypothetical country. Marginal propensity in this country is MPC = 0.75. The central bank in this country (also called the Fed) follows an inflation targeting policy. The current target inflation rate in 8 percent. The natural rate of unemployment is 5 percent and Okun's alpha is 8. Finally the central bank comes to its senses (as the U.S. FED did in 1982) and realizes that 8 percent inflation target is way too high. So it decides to reduce the long-term target inflation rate to 2 percent through a drastic contractionary monetary policy. This policy causes the inflation rate to drop to Moreover, a cyclical unemployment of However, in the long run, inflation rate settles at equals percent. percent in the short run. percent emerges in the labor market. percent and the cyclical rate SRAS

Inflation Rate (П) 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 0 1,000 15.0% 14.0% LRAS 13.0% 12.0% 11.0% 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 Real GDP (Y) AD 10,000 11,000 12,000 13,000 14,000 15,000 16,000 17,000 18,000 19,000 20,000 Consider the graph above. It is also in the files folder under the name Short Run and the Long Run. The graph pertains to a hypothetical country. Marginal propensity in this country is MPC = 0.75. The central bank in this country (also called the Fed) follows an inflation targeting policy. The current target inflation rate in 8 percent. The natural rate of unemployment is 5 percent and Okun's alpha is 8. Finally the central bank comes to its senses (as the U.S. FED did in 1982) and realizes that 8 percent inflation target is way too high. So it decides to reduce the long-term target inflation rate to 2 percent through a drastic contractionary monetary policy. This policy causes the inflation rate to drop to Moreover, a cyclical unemployment of However, in the long run, inflation rate settles at equals percent. percent in the short run. percent emerges in the labor market. percent and the cyclical rate SRAS

Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter2: The One Lesson Of Business
Section: Chapter Questions
Problem 2.6IP
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Inflation Rate (П) 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 0 1,000 15.0% 14.0% LRAS 13.0% 12.0% 11.0% 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 Real GDP (Y) AD 10,000 11,000 12,000 13,000 14,000 15,000 16,000 17,000 18,000 19,000 20,000 Consider the graph above. It is also in the files folder under the name Short Run and the Long Run. The graph pertains to a hypothetical country. Marginal propensity in this country is MPC = 0.75. The central bank in this country (also called the Fed) follows an inflation targeting policy. The current target inflation rate in 8 percent. The natural rate of unemployment is 5 percent and Okun's alpha is 8. Finally the central bank comes to its senses (as the U.S. FED did in 1982) and realizes that 8 percent inflation target is way too high. So it decides to reduce the long-term target inflation rate to 2 percent through a drastic contractionary monetary policy. This policy causes the inflation rate to drop to Moreover, a cyclical unemployment of However, in the long run, inflation rate settles at equals percent. percent in the short run. percent emerges in the labor market. percent and the cyclical rate SRAS
Transcribed Image Text:Inflation Rate (П) 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 0 1,000 15.0% 14.0% LRAS 13.0% 12.0% 11.0% 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 Real GDP (Y) AD 10,000 11,000 12,000 13,000 14,000 15,000 16,000 17,000 18,000 19,000 20,000 Consider the graph above. It is also in the files folder under the name Short Run and the Long Run. The graph pertains to a hypothetical country. Marginal propensity in this country is MPC = 0.75. The central bank in this country (also called the Fed) follows an inflation targeting policy. The current target inflation rate in 8 percent. The natural rate of unemployment is 5 percent and Okun's alpha is 8. Finally the central bank comes to its senses (as the U.S. FED did in 1982) and realizes that 8 percent inflation target is way too high. So it decides to reduce the long-term target inflation rate to 2 percent through a drastic contractionary monetary policy. This policy causes the inflation rate to drop to Moreover, a cyclical unemployment of However, in the long run, inflation rate settles at equals percent. percent in the short run. percent emerges in the labor market. percent and the cyclical rate SRAS
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