Consider the Friedman-Phelps model of the Phillips Curve as discussed in lecture. Assume the economy is currently at Y-full employment. When the Fed sells government securities to the public, and there are no other exogenous shocks to the economy, which one of the following is predicted to happen? The actual inflation rate increases, and the unemployment rate increases permanently. O The actual inflation rate increases, and the unemployment rate increases first and then gradually goes back to the natural rate of unemployment. O The actual inflation rate decreases, and the unemployment rate increases first and then gradually goes back to the natural rate of unemployment. O The actual inflation rate decreases, and the unemployment rate increases permanently. O The actual inflation rate decreases, and the unemployment rate decreases first and then gradually goes back to the natural rate of unemployment.

Consider the Friedman-Phelps model of the Phillips Curve as discussed in lecture. Assume the economy is currently at Y-full employment. When the Fed sells government securities to the public, and there are no other exogenous shocks to the economy, which one of the following is predicted to happen? The actual inflation rate increases, and the unemployment rate increases permanently. O The actual inflation rate increases, and the unemployment rate increases first and then gradually goes back to the natural rate of unemployment. O The actual inflation rate decreases, and the unemployment rate increases first and then gradually goes back to the natural rate of unemployment. O The actual inflation rate decreases, and the unemployment rate increases permanently. O The actual inflation rate decreases, and the unemployment rate decreases first and then gradually goes back to the natural rate of unemployment.

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter17: The Trade-off Between Inflation And Unemploy

Section: Chapter Questions

Problem 6DQ

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Consider the expectations augmented Phillips curve model. Suppose that we are starting from long - runequilibrium with a central bank which cares a lot about unemployment and relatively little about inflation.a) Draw and carefully label the graph of this situation. b) Explain where the Phillips curve comes from inthis model. c) Explain why the equilibrium you specify is the only Nash equilibrium. d) Now suppose that anew central bank governor is appointed who cares a lot about inflation and relatively little aboutunemployment. Redraw your graph twice, once showing what happens if private agents know the newgovernor's preferences and again showing what happens if private agents mistakenly believe that thenew governor has the same preferences as the old governor. Explain clearly why the outcome is differentin the two cases.
A. What assumptions did Thomas Sargent make when he claimed that inflation is always and everywhere a fiscal phenomenon?" B. Why is it appropriate in the book's short-term model for the author to use the Phillips Curve as an Aggregate Supply curve? Does it capture the working of the labor market as well as an AS curve based, say, on sticky wages? C. Provide an example of the book's short-run model being based on "microfoundations."
Assume that inflation falls significantly below expectations. Diagramboth the short-run and long-run effects on employment using a PhillipsCurve diagram. What changes in this model to allow the return to long-runequilibrium?
Using the inflation-unemployment version of the Phillips curve with adaptive expectations, ifaggregate demand increasesA)workers will realize that inflation has changed in the long run but not in the short run.B)the SRPC will immediately shift to the right as workers expect higher pricesC)workers will mistakenly work less, resulting in a decrease in inflation and increase inunemploymentD)actual inflation will be less than expected inflation, resulting in workers mistakenly workingmore and unemployment falling.
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What kind of changesin the economy might infuence the slope of the Phillips curve?
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The Philips curve in an economy is given by a = Επ- 0.5 (u - 6). Assume that the economy starts out at its natural unemployment rate and expected inflation Ex = 5.25%. If output decreases by 2%, using Okun's Law and the Phillips curve relation, what is actual inflation π ?
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Derive the equation of Expectation Augmented Phillips curve using standard equation of Aggregate Supply (AS) and explain causes of inflation in terms of it. How does expectation augmented Phillips curve explain Stagflation?