In the long run the economy reaches the potential output level consistent with the natural rate of unemployment the aggregate supply is vertical with respect to unemployment the Phillips curve is vertical at a given level of expected inflation all of the above none of the above
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- Would you expect to see long-run data trace out a stable downward-sloping Phillips curve?Suppose πt = πt−1 −2(ut −0.04) is the Phillips Curve equation in the economy. Answer thefollowing questions.a. What is the natural rate of unemployment?b. Graph the short run and the long run relationship between inflation and unemployment.c. How much cyclical unemployment is necessary to reduce inflation by 10 percentagepoint?d. The inflation is running at 12 percent. The Central Bank wants to reduce it to 9 percent.Give two scenarios that will achieve the goal.Suppose that the Phillips curve is given byπ t = π te − α ( u t − u n ) ,where the estimated value of the natural rate of unemployment, un = 4.5% and α = 0.4. The expectations are myopic (i.e. fully backward), thus πte = πt−1.a) What is the sacrifice ratio in this economy? Explain in words.Suppose that at time t = 0 unemployment is initially equal to the natural rate (i.e. u0 = 4.5%) and π0 = 7.5%. The central bank decides that 7.5% inflation is too high and that starting in year 1 it will decrease inflation to 3.5%.
- Describe the Phillips curve (O.G., not modified/expectations) and drawa graph of the relationship. How good was this model with 1960’s data vswith data from 1970-2000’s? Explain.a) Explain the concept of the natural rate of unemployment using the expectations-augmented (modified or modern) Phillips curve model. b) Why is this model useful for policy-makers?Consider the Efficiency Wage story. Suppose we had several periods of 0 inflation. Let ST represent the total supply of labor; SNS the supply of non-shirking (not lazy) workers, and SShrk the number of shirking (lazy) workers. Suppose we had several periods of 0% inflation. Then if we had an increase in Aggregate Demand that caused an increase in the Aggregate Price level, we would see which of the following in the short run? Group of answer choices a) higher inflation and lower unemployment. b) None of the other options. c) lower inflation (which would be deflation given our premise) and higher unemployment. d) higher inflation and higher unemployment. e) lower inflation (which would be deflation given our premise) and lower unemployment.
- Assume that the cconomy of Country X his an actual unemployment rate of 7%, a natural rate of unemployment of 5%, and an inflation rate of 3%. Using the numerical values given above, draw a correctly labeled graph of the short-run and long-run Phillips curves. Label the current short-run equilibrium as point B. Plot the numerical values above onthe graph. Assume that the government of Country X takes no policy action to reduce unemployment. In the long run, will each of the following shill to the right, shift to the left, or remain the same? (i) Short-run aggregate supply curve. Explain. (ii) Long-run Phillips curve Identify a fiscal policy action that could be used to reduce the unemployment rate in the short run. Draw a correctly labeled graph of aggregate demand and short-run aggregate supply, and show the impact on the equilibrium price level and real gross domestic product (GDP) of the fiscal policy action identifiedNow let's consider this same scenario in terms of the accelerationist Phillips curve. The labor force is N=64. Find the rates of unemployment before and after as (N-L)/N and map them into our surprise inflation indexes, EP/P. Label the natural rate of unemployment, show the cyclical rate of unemployment.An economy has the following equation for the Phillips Curve: π = Eπ − 0.5(u − 6)People form expectations of inflation by taking a weighted average of the previous two years of inflation: Okun’s law for this economy is: Eπ = 0.7π−1 + 0.3π−2 (Y −Y−1)/(Y-1)=3.0−2.0(u−u−1) Th economy begins at its natural rate of unemployment with a stable inflation rate of 5 percent. 1. What is the natural rate of unemployment for this economy? 2. Graph the short-run tradeoff between inflation and unemployment that this economy faces. Label the point where the economy begins as A. 3. A fall in aggregate demand leads to a recession, causing the unemployment rate to rise 4 percentage points above its natural rate. On your graph, label the point the economy experiences that year as point B.
- Do you observe a Phillips curve, a reverse Phillips curve, or no relationship in the long-run?Explain your answer! What does this imply about the stability of the short-run Phillips curveover time? I attach a picture. Just answer if there is a Phillips curve, a reverse Phillips Curve or no relationship and why you think so. Thank you.1. An economy has the following equation for the Phillips Curve: π = Eπ − 0.5(u − 6)People form expectations of inflation by taking a weighted average of the previous two years of inflation: Okun’s law for this economy is: Eπ = 0.7π−1 + 0.3π−2 (Y −Y−1)/(Y-1)=3.0−2.0(u−u−1) Th economy begins at its natural rate of unemployment with a stable inflation rate of 5 percent. Graph the short-run tradeoff between inflation and unemployment that this economy faces. Label the point where the economy begins as A. (Be sure to give numerical values for point A.) A fall in aggregate demand leads to a recession, causing the unemployment rate to rise 4 percentage points above its natural rate. On your graph in part (b), label the point the economy experiences that year as point B.(Be sure to give numerical values.) Unemployment remains at this high level for two years (the initial year described in part (c) and one more), after which it returns to its natural rate. Create a table showing…Suppose that an economy has the Phillips curvep=p-1 - O.S(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 S percentage points?d) Using Okun's law, compute the sacrifice ratio e.e)Inflation is running at 10 percent. The Fed wants to reduce it to 5 percent. Give Iwoscenarios that will achieve that goal.
