Question

Explain the actions the FED should take if it wanted to move from a point on the short-run Phillips curve representing high unemployment and low inflation to a point representing lower unemployment and higher inflation.

Answer 1

The short run Phillips curve states that there is an inverse relationship between unemployment and inflation in the short run.

Since unemployment is high and the inflation rate is low, in order for the FED to decrease unemployment and increase inflation it must decrease the interest rate. That way, the economy should kick off and start growing which should decrease unemployment and at the same time will increase inflation.