In the Phillips curve equation B is a parameter that measures Select one: a. The response of inflation to cyclical unemployment O b. the response of inflation to the supply shock O c. the amount by which cyclical unemployment differs from the natural rate of unemployment O d. How much expected inflation differs from current inflation when there is cyclical unemployment

In the Phillips curve equation B is a parameter that measures Select one: a. The response of inflation to cyclical unemployment O b. the response of inflation to the supply shock O c. the amount by which cyclical unemployment differs from the natural rate of unemployment O d. How much expected inflation differs from current inflation when there is cyclical unemployment

Principles of Economics, 7th Edition (MindTap Course List)

7th Edition

ISBN:9781285165875

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

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

Section: Chapter Questions

Problem 3QCMC

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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.
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)?
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