Exhibit 17-5 Short-Run and Long-Run Phillips Curve

Multiple Choice

Exhibit 17-5 Short-run and long-run Phillips curve

Suppose the government shown in Exhibit 17-5 uses contractionary monetary policy to reduce inflation from 9 to 6 percent. If people have rational expectations, then:

A) the economy will remain stuck at point E₁.
B) the natural rate will permanently increase to 8 percent.
C) unemployment will rise to 8 percent in the short run.
D) unemployment will remain at 6 percent as the inflation rate falls.