Macroeconomics 11th Edition by Michael Parkin

Exercise 25

Iran Postpones Cutting Gasoline Subsidies
Inflation is about 10 percent and the unemployment rate is about 14 percent. Earlier this month Iran's main audit body slammed the government's plan to scrap gasoline subsidies, warning that implementing such a reform might result in unrest. The government also intends to scrap subsidies on natural gas, which most Iranians use for cooking and heating, as well as electricity, but the new prices are still not known. However, in recent weeks some households have received electricity bills with nearly sevenfold price increases.
a. If Iran removes the subsidies and consumers don't know what the higher prices will be, draw a graph to show the most likely path of inflation and unemployment.
b. If Iran removes the subsidies and announces the new prices so that consumers know what they are, draw a graph to show the most likely path of inflation and unemployment.