A) Suppose that an economy has the Phillips curve π = π-1 – 0.5(u − 0.06). 1) Graph the short-run and long-run relationships between inflation and unemployment. 2)How much cyclical unemployment is necessary to reduce inflation by 3 percentage points? Using Okun’s law, compute the sacrifice ratio. B)Mathematically prove that balanced budget multiplier is one. Interpret it

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter16: Macro Policy Debate: Active Or Passive?

Section: Chapter Questions

Problem 3.4P

See similar textbooks

Similar questions

State whether the following statements are true or false, justify your response in either case:1. Government has applied tax cut twice in last year to stimulate the output growth of economy which is still not achieved. The mentioned situation exemplifies the “Inside lag.”2. Fiscal policy can affect the rental cost of capital.3. The concept of sacrifice ratio suggests that reducing inflation is a costless exercise.4. The short run trade off between inflation and unemployment depends upon whether people form their expectations rationally or adaptively.5. Concept of Hysteresis suggests that the economic shocks affect the economy only for a short time period.
True, false or obscure. Justify your conclusion. a) It is desirable to have inflation as close to zero as possible b) High inflation means low unemployment c) The turnover rate of money decreases when nominal interest rates are high d) The probability of the unemployed finding a job is greater if more people change jobs during a given period e) Sticky wages make the Phillips curve steep
Please no written by hand solution Suppose you are given the following scenario: The Federal Reserve has reported the federal funds rate at 2.75 percent. The economy’s growth rate over the past several quarters has languished around 1 percent (annualized) per year while unemployment has increased by 1.5 percentage points to a current national average of 8.7 percent. The GDP deflator index has remained relatively steady, yielding an average inflation rate of 1.8 percent over the last two years. What would you recommend as a Keynesian policy advisor? In the first part of your answer, identify the economic problem(s) best described in the scenario above. Secondly, determine the appropriate economic policy (fiscal or monetary) that would be most effective in responding to the economic problem(s) identified in part one. Lastly, explain the consequences your recommended policy would have on the macroeconomy in both the short run and the long run. Your answer should be at leas a couple of…
Question 6 Read parts (i) to (iii) before answering. Answer all three parts on a single diagram. Assume that the economy experiences no change in productivity, money demand or its natural rate of unemployment in either the short or long run. The inflation rate responds immediately to correspond to the money supply growth rate. However, wage inflation adjusts to changes in the inflation rate with a time lag. (i) Draw a diagram with inflation on the vertical axis and the unemployment rate on the horizontal axis that illustrates the Phillips curve relationship in the short run. Label the curve as PC1. Mark a point N on the horizontal axis that represents the natural rate of unemployment. (ii) Assume that the economy is initially on the curve PC1 at the natural rate of unemployment, with a 5 % rate of increase in the money supply and a 5% inflation rate. Mark point A on the curve PC1 which you would expect to observe if there was an unexpected increase in the rate of growth of the…
(Inflation and Unemployment in the Short-Run) Suppose that an economy has the Phillips curve p = p−1 – 0.5(u − 0.06). A. What is the natural rate of unemployment? B. Graph the short-run and long-run relationships between inflation and unemployment. C. How much cyclical unemployment is necessary to reduce inflation by 5 percentage points? Using Okun’s law, compute the sacrifice ratio. D. Inflation is running at 10 percent. The Fed wants to reduce it to 5 percent. Give two scenarios that will achieve that goal.
The diagram opposite shows two short-run Phillips curves (PC0 and PC1). PC0 corresponds to a situation in which workers expect no inflation. (a) What is the natural rate of unemployment? (b) What is the expected rate of inflation if the Phillips curve is PC1? Suppose that the economy begins in long-run equilibrium with zero inflation and that the authorities adopt a policy of constant monetary growth because they wish to reduce unemployment below its existing level. (c) Identify the short-run effect on unemployment and inflation. Unemployment........................................................................................................................…
Which, if any, of the following statements is true? (a)Crowding-out refers to a situation in which an increase in government spending reduces the size of the multiplier. (b)An interest rate cut usually stimulate the aggregate demand through the investment channel. (c)The Phillips curve is a graphical demonstration of a positive relationship between inflation and unemployment. (d)The Okun’s law is a graphical representation of a negative relationship between inflation and unemployment. (e)The presence of taxes in the multiplier model tends to increase the size of the multiplier.
Draw a Phillips curve graph here that shows a natural rate of unemployment of 4% and a current inflation rate of 2%. Make sure your lines and axes are labeled and your graph is complete! Use your knowledge of The Phillips Curve to answer the following questions. The threat of future inflation: makes people reluctant to loan money for long periods. makes people eager to loan money for long periods. has no effect on loaning money. increases the value of money paid back in the future. makes people reluctant to borrow money for long periods. According to the short-run Phillips Curve, there is a trade-off between: interest rates and inflation. the growth of the money supply and interest rates. unemployment and economic growth. inflation and unemployment. economic growth and interest rates. Which of the following is true of the long-run Phillips curve? it shows there is a trade-off between unemployment and inflation. it is positively sloped when the inflation rate exceeds…
Moving along the short-run Phillips curve, if ________ increases, then ________ decreases. unemployment; the expected inflation rate unemployment; the price level inflation; the price level inflation; real GDP inflation; unemployment According to Okun's Law, when the natural employment rate is 6 percent and potential GDP is $10 trillion, then when actual employment is 7 percent, real GDP is $9.8 trillion. $10.1 trillion. $10.2 trillion. $9.9 trillion. $8 trillion. The long-run Phillips curve shows the relationship between inflation and interest rates at full employment. aggregate demand and aggregate supply at full employment. inflation and unemployment at full employment. aggregate demand and interest rates at full employment. the price level and real GDP when the economy is not at full employment. If the expected inflation rate changes, the long-run Phillips curve ________, and the short-run Phillips curve ________. does not shift; does not…
The economy in Country X is in a recession, with real gross domestic product (GDP) $100 billion below full-employment output. (a) Draw one correctly labeled graph of the short-run and long-run Phillips curves, labeling the current equilibrium point A. (b) Assume that the government increases spending by $20 billion to stimulate economic activity. Assume that the marginal propensity to save is 0.25. Calculate the maximum total change in real GDP that could occur following the $20 billion increase in government spending. (c) On your graph in part (a), label the new equilibrium point B as a result of the increase in government spending. (d) Had the government lowered personal income taxes by $20 billion instead of increasing spending by $20 billion, would the maximum total change in real GDP be greater than, smaller than, or the same as the one calculated in part (b) ? Explain.
Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to “Calculate,” you must show how you arrived at your final answer. 1. Assume that the United States economy is currently in a recession in a short-run equilibrium. a. Draw a correctly labeled graph of the short-run and long-run Phillips curves. Use the letter A to label a point that could represent the current state of the economy in recession. b. Draw a correctly labeled graph of aggregate demand and aggregate supply in the recession and show each of the following. i)The long-run equilibrium output, labeled Yf ii) The current equilibrium output and price levels, labeled Ye and PLe, respectively C)To balance the federal budget, suppose that the government decides to raise income taxes while maintaining the current level of government spending. On the graph…
Suppose the Phillips curve in Country A is estimated to be ??=???−0.25(??−?∗?)πt=πte−0.25(ut−ut∗)(supplied in picture) The natural rate of unemployment in the year 2020 equals 3%. Inflation in the year 2020 is expected to be around 1%. The Okun’s coefficient in Country A equals 2. The central bank of Country A is considering three possible monetary policy scenarios for the year 2020. Scenario 1: the central bank performs a monetary contraction, and the inflation rate becomes 0.5%. Scenario 2: the central bank performs a monetary expansion, and the inflation rate becomes 1.5%. Scenario 3: the central bank keeps monetary policy unchanged, and the inflation rate matches expected inflation and equals 1%. For each of these policy scenarios, 1) Determine the corresponding rate of cyclical unemployment in 2020 2) Determine the actual unemployment ??ut that would result in 2020 3) Use Okun’s law to determine the corresponding…