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    Phillips curves and federal control of money supply

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    1. What is a Phillips curve? Assuming the economy's aggregate supply curve is stable, how would an increase in aggregate demand affect the unemployment rate and the inflation rate?
    2. Consider this statement: "Banks do not create money because this is the Fed's responsibility". Do you agree or disagree?
    3. What are some problems faced by the Fed in controlling the money supply?

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    Solution Preview

    1. Phillips curve shows the empirical tradeoff between inflation and unemployment. Inflation tends to be low when unemployment is high and vice versa. This empirical relationship between inflation and unemployment was first discovered by Phillips in 1958 by examining 97 years British data. This tradeoff presents difficult and problematic political issues to policy makers. Inflation and unemployment are sometime called twin evils, because both are bad.

    If the supply (AS) is stable, the economy is most likely running at a full capacity that is all resources in the economy are fully utilized. The output is at the ...

    Solution Summary

    The solution explains what a Phillips curve is, how an increase in aggregate demand would affect the unemployment rate and inflation, and some problems that the federal government faces in controlling money supply.