Question

Consider Figure $17-5$, and suppose that the economy initially operates at point $A$, at which the inflation rate is $0$percent and the unemployment rate is $6$percent, which is the natural rate of unemployment. In the long run, will an increase in the inflation rate to $3$percent result in the economy operating at point $B$or at point $F_1$? Explain your reasoning.

Short answer

This new curve is additionally a Phillips curve, differing from the primary pct. therein the particular rate in step with a $3$ percent pct. is higher, at $6$ percent, because the expectedrate is higher.

Step-by-step solution

introduction

The frictional unemployment, commonly known as biological job loss, is the lowest jobless rate caused by genuine or spontaneous economic realities. Natural unemployment represents the amount of persons who are unemployed as a byproduct of working army's structure, like those who were superseded by tech or who lack the basic means to find job.

Explanation

• If the authorities continue the stimulus in an endeavor to stay the percentage down, workers' expectations will adjust, causing the percentage to rise, during this second stage, the economy moves from $B$to point $F_1$.
• This new curve is additionally a Phillips curve, differing from the primary pct, therein the particular rate in step with a $0$ percent pct. is higher, at localid="1652100070994" $6$ percent, because the expected rate is higher. Of course, if future changes in policies generating an increase within the rate from $3$percent to six percent are fully anticipated.