Unit 5: Long-Run Consequences of Stabilization Policies

The following data describe the economy of Eastbrook: • Natural rate of unemployment: 4% • Frictional unemployment: 1.5% • Structural unemployment: 2.5% • Cyclical unemployment: 3% • Current inflation rate: 2% • Expected inflation rate: 4%

The country of Verdana has experienced declining productivity growth over the past decade. The government is considering policies to promote long-run economic growth.

The government of Lakeside implements expansionary fiscal policy by increasing government spending to close a recessionary gap. The increased spending is financed by government borrowing.

The economy of Westfield is currently at long-run equilibrium with an unemployment rate of 5% and an inflation rate of 2%. Workers and firms then begin to expect higher inflation in the future.

The economy of Ravenmoor is experiencing a significant recession with high unemployment and declining real GDP. Both the government and central bank are considering policy options.