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5. An oil shock: Consider an economy that begins with output at its potential level and a relatively high inflation rate of 6%, reflecting some recent oil price shocks. As the head of the Federal Reserve, your job is to pick a sequence of short-run output levels that will get the rate of inflation back down to 3% no later than 3 years from now. Your expert staff offers you the following menu of policy choices: -Short-run output- -Inflation- Year 2 3% 3% 4% Option 1 2 ETUA 3 Year 1 -6% 120m - 4% NOMIN -2% Year 2 0 BEVEST -2% of evingut -2% Year 3 0 101201 0 -2% Year 1 3% ette 4% o ba 5% di (d) Explain the general trade-off that policymakers are faced with according to the Phillips curve. Year 3 3% 3% 0500 3% (a) According to these numbers, what is the slope of the Phillips curve? (b) If you as a policymaker cared primarily about output and not much about the inflation rate, which option would you recommend? Why? (c) If you cared primarily about inflation and not much about output, which option would you recommend? Why? Slobom nm-noda Exercises 261

5. An oil shock: Consider an economy that begins with output at its potential level and a relatively high inflation rate of 6%, reflecting some recent oil price shocks. As the head of the Federal Reserve, your job is to pick a sequence of short-run output levels that will get the rate of inflation back down to 3% no later than 3 years from now. Your expert staff offers you the following menu of policy choices: -Short-run output- -Inflation- Year 2 3% 3% 4% Option 1 2 ETUA 3 Year 1 -6% 120m - 4% NOMIN -2% Year 2 0 BEVEST -2% of evingut -2% Year 3 0 101201 0 -2% Year 1 3% ette 4% o ba 5% di (d) Explain the general trade-off that policymakers are faced with according to the Phillips curve. Year 3 3% 3% 0500 3% (a) According to these numbers, what is the slope of the Phillips curve? (b) If you as a policymaker cared primarily about output and not much about the inflation rate, which option would you recommend? Why? (c) If you cared primarily about inflation and not much about output, which option would you recommend? Why? Slobom nm-noda Exercises 261

Brief Principles of Macroeconomics (MindTap Course List)
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
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5. An oil shock: Consider an economy that begins with output at its potential level and a relatively high inflation rate of 6%, reflecting some recent oil price shocks. As the head of the Federal Reserve, your job is to pick a sequence of short-run output levels that will get the rate of inflation back down to 3% no later than 3 years from now. Your expert staff offers you the following menu of policy choices: -Short-run output- -Inflation- Year 2 3% 3% 4% Option 1 2 ETUA 3 Year 1 -6% 120m - 4% NOMIN -2% Year 2 0 BEVEST -2% of evingut -2% Year 3 0 101201 0 -2% Year 1 3% ette 4% o ba 5% di (d) Explain the general trade-off that policymakers are faced with according to the Phillips curve. Year 3 3% 3% 0500 3% (a) According to these numbers, what is the slope of the Phillips curve? (b) If you as a policymaker cared primarily about output and not much about the inflation rate, which option would you recommend? Why? (c) If you cared primarily about inflation and not much about output, which option would you recommend? Why? Slobom nm-noda Exercises 261
Transcribed Image Text:5. An oil shock: Consider an economy that begins with output at its potential level and a relatively high inflation rate of 6%, reflecting some recent oil price shocks. As the head of the Federal Reserve, your job is to pick a sequence of short-run output levels that will get the rate of inflation back down to 3% no later than 3 years from now. Your expert staff offers you the following menu of policy choices: -Short-run output- -Inflation- Year 2 3% 3% 4% Option 1 2 ETUA 3 Year 1 -6% 120m - 4% NOMIN -2% Year 2 0 BEVEST -2% of evingut -2% Year 3 0 101201 0 -2% Year 1 3% ette 4% o ba 5% di (d) Explain the general trade-off that policymakers are faced with according to the Phillips curve. Year 3 3% 3% 0500 3% (a) According to these numbers, what is the slope of the Phillips curve? (b) If you as a policymaker cared primarily about output and not much about the inflation rate, which option would you recommend? Why? (c) If you cared primarily about inflation and not much about output, which option would you recommend? Why? Slobom nm-noda Exercises 261
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