answer only part d , e and f 1. Mutations of the Phillips curveSuppose that the Phillips curve is given by7, = x; + 0.1– 2u,a. What is the natural rate of unemployment?Assume z; = On, and suppose that e is initially equal to 0. Suppose that the rateof unemployment is initially equal to the natural rate. In year 1, the authorities decideto bring the unemployment rate down to 3% and hold it there forever.b. Determine the rate of inflation in years 1,1+1,1+2, and 1+5.c. Do you believe the answer given in (b)? Why or why not?(Hint: Think about how people are likely to form expectations of inflation.)Now suppose that in year 1+5, 0 increases from 0 to 1. Suppose that thegovernment is still determined to keep u at 3% forever.d. Why might 0 increase in this way?e. What will the inflation rate be in years 1+5, 1+6, and 1+7?f. Do you believe the answer given in (e)? Why or why not?

Phillips Curve is referred to as a theory which states that there is an inverse relationship between…

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1. Mutations of the Phillips curve Suppose that the Phillips curve is given by 7, = n; +0.1– 2u,

Principles of Economics, 7th Edition (MindTap Course List)

7th Edition

ISBN:9781285165875

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter35: The Short-Run Trade-off Between Inflation And Unemployment

Section: Chapter Questions

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Please no written by hand solutions Suppose that the markup of goods prices over marginal cost is 5%, and that the wage-setting equation is W= P(1-u), where u is the unemployment rate. a. What is the real wage, as determined by the price-setting equation? b. What is the natural rate of unemployment? c. Suppose that the markup of prices over costs increases to 10%. What happens to the natural rate of unemployment? Explain the intuition behind your answer.
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In a country with a labor force of 200, a different group of 10 people becomes unemployed each month but becomes employed once again a month later. No others outside these groups are unemployed. EXPLAIN YOUR ANSWER!a. What is this country’s unemployment rate?b. What is the average duration of unemployment?c. Suppose that establishment of a system of unemployment compensation increases to twomonths the interval that it takes each group of job losers to become employed each month. Nevertheless, a different group of 10 people still becomes unemployed each month. Now what is the average duration of unemployment?d. Following the change discussed in part (c), what is the country’s unemployment rate?
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1. An economy has the following equation for the Phillips Curve: π = Eπ − 0.5(u − 6)People form expectations of inflation by taking a weighted average of the previous two years of inflation: Okun’s law for this economy is: Eπ = 0.7π−1 + 0.3π−2 (Y −Y−1)/(Y-1)=3.0−2.0(u−u−1) Th economy begins at its natural rate of unemployment with a stable inflation rate of 5 percent. Graph the short-run tradeoff between inflation and unemployment that this economy faces. Label the point where the economy begins as A. (Be sure to give numerical values for point A.) A fall in aggregate demand leads to a recession, causing the unemployment rate to rise 4 percentage points above its natural rate. On your graph in part (b), label the point the economy experiences that year as point B.(Be sure to give numerical values.) Unemployment remains at this high level for two years (the initial year described in part (c) and one more), after which it returns to its natural rate. Create a table showing…
15. Suppose that the relationship between inflation rate (π) and unemployment rate (u) is described by the following equation: πt – πte = (m + z) – αut where m = 0.05, z = 0.04, and α = 2. In this economy, the authorities keep unemployment rate at 4% forever. a. If the modified Philips curve describes the relationship between π and u correctly, how should “πte” be specified? Rewrite the equation using this specification. Assume that πt–1 = 1%. Compute πt, πt+1, and πt+2. b. Do you believe the answer in part (a)? Why or why not? c. Derive the natural rate of unemployment.