Reference no: EM133359347
An economy has a natural unemployment rate of 5%, an actual unemployment rate of 2%, and an inflation rate of 9%.
a. Draw a fully labeled graph of the short-run and long-run Phillips curves. Label the current short-run equilibrium Z, and plot the numerical values on your graph.
b. What is the cyclical unemployment rate in this economy?
c. What would be the impact on the short-run Phillips curve if the government increases taxes? Explain.
d. What will happen to the long-run Phillips curve if the government pursues contractionary policy?
e. Assume that a Federal Reserve policy successfully restores full employment. Illustrate the outcomes of this policy on your graph from part (a).
f. Identify one action the Federal Reserve may have taken in part (e).
g. Assume an economy is in a recession. Using completely labeled side-by-side AD-AS and Phillips curve graphs, illustrate the process and outcomes of long-run self-adjustment in the economy without government intervention.
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