Assume That an Economy Is Initially at the Natural Rate

Essay

Assume that an economy is initially at the natural rate of unemployment. a. Use a Phillips curve diagram to illustrate graphically how the inflati on rate and unemployment rate respond both in the short run and in the long run to an unexpected expansionaty monetary policy.
b. Use a Phillips curve diagram to illustrate graphically how the inflation rate and unemployment rate respond both in the short run and in the long run to the announcement of a credible plan of expansionary monetary policy when people have rational expectations.