4. The expectation augmented Phillips curve takes the form T = T° – 3(u – ū), with the natural rate of unemployment ū = 0.04. Assume that the Okun's law holds so that a 1 percentage point increase in the unemployment rate reduces GDP by 2% of full-employment output. What is the percentage deviation of output from full- employment output if actual inflation is 9% and expected inflation is 4.5%? (а) -3%. (b) -2%. (c) 2%. (d) 3%. (Right answer)

4. The expectation augmented Phillips curve takes the form T = T° – 3(u – ū), with the natural rate of unemployment ū = 0.04. Assume that the Okun's law holds so that a 1 percentage point increase in the unemployment rate reduces GDP by 2% of full-employment output. What is the percentage deviation of output from full- employment output if actual inflation is 9% and expected inflation is 4.5%? (а) -3%. (b) -2%. (c) 2%. (d) 3%. (Right answer)

Principles of Economics (MindTap Course List)

8th Edition

ISBN:9781305585126

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

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

Section: Chapter Questions

Problem 2PA

See similar textbooks

Similar questions

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)?
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
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.
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?
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%)
5. The stock market crash has caused a great number of asset prices to drop sharply.If people’s expectation on current inflation level remain unchanged, what wouldbe the effects of this crisis to inflation and unemployment? Explain and useappropriate diagrams to support your answer.