Question

Suppose the Bank of Canada unexpectedly raises the inflation target from 2% to 5%. Using the...

Suppose the Bank of Canada unexpectedly raises the inflation target from 2% to 5%. Using the Phillips Curve diagram, explain how this would affect the unemployment rate, in the short run and in the long run.

NO HANDWRITINGS PLEASE. I CAN'T READ MOST OF THE HANDWRITINGS, UNFORTUNATELY. THANKS IN ADVANCE FOR TYPING ANSWERS

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Answer #1

suppose we know that the  intilay the economy is at point F where inflation = 2% and also the unemployment = OE1. According to Philips curve in an economics we know that the there exists a trade off of inflation and unemployment are increase rapidily. the  inflation targeted to from 2% to 5% would be the cause the economy to move from point F to point B on PC1(SR) in the short run (SR). .At an point B , inflation = 5% and unemployment has been fallen to OE2.

In the log run the Philips curve can be  shift from PC1(SR) to PC2(SR) such that the economy will reaches to point C on the long run Philips curve which is to be vertical at the natural rate of unemployment . At point C , inflation rate = 5% and unemployment returns to its natural rate = OE1.

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