Sia
Question
Microeconomics
Posted 5 months ago
Which of the following best describes the long-run Phillips curve (“LRPC")?
Choose 1 answer:
A downward sloping showing the tradeoff between inflation and unemployment
(B) Upward sloping showing the positive relationship between output and the price level
(C) vertical at the natural rate of unemployment
(D) Upward sloping showing the positive relationship between inflation and unemployment
(E) Vertical at the current rate of unemployment
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Answer from Sia
Posted 5 months ago
Sure, let's address the multiple-choice question about the long-run Phillips curve (LRPC) first.
Solution
a
Definition of LRPC: The long-run Phillips curve (LRPC) is a concept in economics that shows the relationship between inflation and unemployment in the long run
b
Vertical Nature: In the long run, the LRPC is vertical because it represents the natural rate of unemployment, which is unaffected by inflation
c
Natural Rate of Unemployment: The natural rate of unemployment is the level of unemployment that the economy tends to return to in the long run, regardless of the rate of inflation
d
Correct Answer: Therefore, the correct answer is (C) vertical at the natural rate of unemployment
Answer
(C) vertical at the natural rate of unemployment
Key Concept
Long-run Phillips curve (LRPC)
Explanation
The LRPC is vertical at the natural rate of unemployment because, in the long run, there is no trade-off between inflation and unemployment. The economy will always return to this natural rate regardless of the inflation rate.
Now, let's address the other questions related to the impact of citizens in Fredland saving more on the market for loanable funds, the appropriate action for the central bank to take to reduce the impact of expansionary fiscal policy on interest rates, and the combination of monetary and fiscal policy needed to return an economy to full employment in Mithrim.
Impact of Citizens in Fredland Saving More on the Market for Loanable Funds
Solution
a
Increase in Supply: When citizens save more, the supply of loanable funds increases
b
Supply Curve Shift: This increase in supply shifts the supply curve for loanable funds to the right
c
Interest Rates: As a result, the equilibrium interest rate decreases
d
Investment: Lower interest rates make borrowing cheaper, which can increase investment
Answer
Increase in supply of loanable funds, leading to lower interest rates and potentially higher investment
Key Concept
Market for Loanable Funds
Explanation
An increase in savings increases the supply of loanable funds, which lowers the equilibrium interest rate and can stimulate investment.
Appropriate Action for the Central Bank to Reduce the Impact of Expansionary Fiscal Policy on Interest Rates
Solution
a
Expansionary Fiscal Policy: This policy increases government spending or decreases taxes, leading to higher demand for loanable funds
b
Interest Rates: Higher demand for loanable funds can increase interest rates
c
Central Bank Action: To counteract this, the central bank can implement an expansionary monetary policy
d
Open Market Operations: The central bank can buy government securities to increase the money supply
e
Lower Interest Rates: This action will lower interest rates, offsetting the increase caused by fiscal policy
Answer
Implement expansionary monetary policy, such as buying government securities, to lower interest rates
Key Concept
Expansionary Monetary Policy
Explanation
The central bank can use expansionary monetary policy to increase the money supply and lower interest rates, counteracting the effects of expansionary fiscal policy.
Combination of Monetary and Fiscal Policy Needed to Return an Economy to Full Employment in Mithrim
Solution
a
Full Employment: Full employment occurs when all available labor resources are being used in the most economically efficient way
b
Fiscal Policy: The government can use expansionary fiscal policy (increase spending or decrease taxes) to boost aggregate demand
c
Monetary Policy: The central bank can use expansionary monetary policy (lower interest rates) to encourage borrowing and investment
d
Combined Effect: Together, these policies can increase aggregate demand, leading to higher output and employment
Answer
Use both expansionary fiscal policy and expansionary monetary policy to increase aggregate demand and achieve full employment
Key Concept
Expansionary Fiscal and Monetary Policy
Explanation
Combining expansionary fiscal and monetary policies can effectively increase aggregate demand, leading to higher output and employment, thus returning the economy to full employment.
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