Suppose that the Fed unexpectedly increases the rate of money growth. Carefully explain the effect on short-term and long-term interest rates, and why those effects are different.
The Phillips curve represents the trade off between interest rates and unemployment. The economy is expected to always return to a natural rate of unemployment in the long run, but there is a short run trade-off. In the short run, as long as the change in the growth rate of money is unanticipated, we can expect to see an decrease in unemployment. Since wage changes influence prices, there will be a negative relationship between price inflation and unemployment. This results from the increase in inflation from the wage level increase. Whenever unemployment declines, price levels increase and vice versa. In fact, there is a family of short-run Phillips curves corresponding to different expected inflation rates; each curve is negatively ...
A rate of money growth for unexpectedly increase money growth are determined.