11. Assume that an economy is governed by the Phillips curve a =n° – 0.5 (u – 0.06), where n = (P – P-1) / P-1, n° = n_1, and 0.06 is the natural rate of unemployment. Suppose that, in period zero, n= 0.03 and n° = 0.03–that is, that the economy is experiencing steady inflation at a 3-percent rate. a. Now assume that the government decides to impose whatever demand is necessary t unemployment to 0.04. Suppose the government follows this policy for periods 1 thi Create a table of a and nº for these five periods. b. Assume that, for periods 6 through 10, the government decides to hold unemployme 0.06. Create another table of a and nº for these five periods. Is there any reason to e) inflation rate to go back to 0.03? c. If the government persisted in its behavior under part a, do you think the public wou continue for long forming expectations according to n° = T-1? Why?

11. Assume that an economy is governed by the Phillips curve a =n° – 0.5 (u – 0.06), where n = (P – P-1) / P-1, n° = n_1, and 0.06 is the natural rate of unemployment. Suppose that, in period zero, n= 0.03 and n° = 0.03–that is, that the economy is experiencing steady inflation at a 3-percent rate. a. Now assume that the government decides to impose whatever demand is necessary t unemployment to 0.04. Suppose the government follows this policy for periods 1 thi Create a table of a and nº for these five periods. b. Assume that, for periods 6 through 10, the government decides to hold unemployme 0.06. Create another table of a and nº for these five periods. Is there any reason to e) inflation rate to go back to 0.03? c. If the government persisted in its behavior under part a, do you think the public wou continue for long forming expectations according to n° = T-1? Why?

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter6: Measuring The Cost Of Living

Section: Chapter Questions

Problem 9PA

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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.
3) Suppose that a fall in consumer spending causes a recession a)Illustrate the immediate changes in the economy using both an aggregate-supply/aggregate-demand diagram and a Phillips-curve diagram.On both graphs, label the initial long-run equilibrium as point A and the resulting short-run equilibrium as point B.What happens to inflation and unemployment in the short-run b)Now suppose that over time expected inflation changes in the same direction that actual inflation changes.What happens to the position of the short-run Phillips curve? After the recession is over, does the economy face a better or worse set of inflation-unemployment combinations? Explain.
13. Suppose the Phillips curve is represented by the following equation: πt − πt−1 = 20 − 2ut. Given this information, which of the following is most likely to occur if the actual unemployment in any period is equal to 6%? the rate of inflation will tend to increase the rate of inflation will be constant the rate of inflation will tend to decrease none of the above
Suppose that a fall in consumer spending causes a recession. a. Illustrate the changes in the economy using both an aggregate supply/aggregate demand diagram and a Phillips curve diagram. What happens to inflation and unemployment in the short run? (5%) b. Now suppose that over time, expected inflation changes in the same direction that actual inflation changes. What happens to the position of the short-run Phillips curve? After the recession is over, does the economy face a better or worse set of inflation– unemployment combinations? (5%)
24. Which of the following groups benefit from an unanticipated rise in the inflation rate ? O. homeowners with foxed - rate mortgages O. elderly people living on fixed incomes O. creditors or lenders O. workers on contracts without escalator claines 25. Suppose oil prices continue to rise , causing a supply shock . If the Fed increases interest rates , what would be the long run outcome ? O. The economy returns to long run equilibrium at a lower output but higher price level O. The economy returns to long run equilibrium at the original price level and output O. The economy returns to full employment but at a higher price level O. The economy returns to the original price level but at a lower output
Describe the emphasis that the neoclassical perspective takes on the macroeconomy, relative to the Keynesian perspective (Chapter 12). Discuss the importance of capital per person and the role of flexible prices in their perspective. What role do rational or adaptive expectations play in flexible prices? (13.1)
7. Suppose that people expect inflation to equal 3%, but in fact, prices rise by 5%. Describe how this unexpectedly high inflation rate would help or hurt the following: A.) the governmentB.) a homeowner with a fixed-rate mortgageC.) a union worker in the second year of a labor contractD.) a college that has invested some of its endowment in government bonds
5. Consider the Phillips curve πt = πt-1 – 0.5(ut – 0.01). a) What is the natural rate of unemployment? Graph the short-run and long-run relationships between inflation and unemployment? b) How much unemployment is necessary to reduce inflation by 3%? Compute the sacrifice ratio. Show your work. c) Do flexible exchange rates permit a country to pick its own unemployment-inflation trade-off target?
2. If a higher inflation is expected, what would you expect to happen to the shape of theyield curve? Why?
4. Consider the ASAD model of a closed economy with zero ongoing inflation and workers misperceptions. Firms are perfectly competitive, produce output with diminishing marginal returns to labour and have perfect foresight over the price level. Workers, instead, expect zero inflation in each period. At time zero, the economy is in the potential equilibrium. There is a negative shock on aggregate demand – for example, a permanent fall in desired autonomous consumption at time t = 1. What are the effects of the shock on the equilibrium real wage in the short and in the medium run? Describe (at least in words, and even better in a diagram) the entire time path of the real wage from before the shock to the medium-run equilibrium. Prove your statements formally – for example, use the diagram of the labour market where you measure the real wage on the vertical axis, and distinguish the very short run (the temporary equilibrium at time t = 1) from the medium run. Carefully explain the…
Consider the expectations adjusted Phillips’s curve and assume that expected inflation is given by πet = πt-1. Suppose that unemployment is initially equal to the natural rate and that π=10%. The central bank decides that inflation is too high and that, starting in year t, it will maintain the unemployment rate 1% point above the natural rate until the inflation rate has decreased to 2%. (a) What is the sacrifice ratio in this economy [Hint: the sacrifice ratio is the percentage of a year’s excess unemployment needed to reduce inflation by 1%. For a Philips curve given as πet − πt −1 = −α (ut − un ), the sacrifice ratio is 1/α]? (b) Compute the rate of inflation for year t, t+1, t+2, t+3, …, t+8. (c) For how many years must the central bank keep the unemployment rate above the natural rate of unemployment? Is the implied sacrifice ratio consistent with your answer to (a)?
1.Now suppose that the increase in investment spending was entirely anticipated by firms and workers. This means the public fully anticipates the rightward shift of the aggregate demand curve (from AD1AD1 to AD2AD2). According to rational-expectations adherents, the anticipated change in aggregate demand will cause the economy to move in which direction? A.Directly from point N to point Z B.From point N to point K, before returning to point N C.From point N to point D, before returning to point N D.From point N to point D and, eventually, from point D to point Z 2.Suppose next year, the Fed once again announces that its monetary policy is aimed at maintaining price stability at the level reached last year (the price level you found in the previous question) and output at potential output ($8 trillion). However, because the government reneged on its promise last year, workers and firms suspect that the Fed will again shift to an expansionary policy. As a result,…