The economy short-run and long-run phillips curves

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Suppose the economy is in long-run equilibrium. (a) Draw the economy’s short-run and long-run Phillips curves. (b) Suppose a wave of business pessimism reduces aggregate demand. Show the effect of this shock on your diagram from part (a). If the Fed undertakes expansionary monetary policy, can it return the economy to its original inflation rate and unemployment rate? (c) Now suppose the economy is back in long-run equilibrium and then the price of im- ported oil rises. Show the effect of this shock with a new diagram like the one in part (a). If the Fed undertakes expansionary monetary policy, can it return the economy to its original inflation rate and unemployment rate? What if it the Fed undertakes contractionary monetary policy? Explain how this situation differs from part (b).

Reference no: EM131099008

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