(Module 34) The economy of Maxistan is in long-run equilibrium. The non-accelerating inflation rate of unemployment is 6% and inflation expectations are currently 3%. a. Draw a correctly labeled graph that shows the short-run and long-run Phillips curves, the current rate of inflation and the unemployment rate. b. Suppose the government of Maxistan decreases taxes. In the graph from part (a), identify a point "T" that might reflect the new short-run equilibrium in the economy. c. Describe how the economy in Maxistan would adjust in the long run to the tax decrease from part (b). Describe how this would affect the graph.

(Module 34) The economy of Maxistan is in long-run equilibrium. The non-accelerating inflation rate of unemployment is 6% and inflation expectations are currently 3%. a. Draw a correctly labeled graph that shows the short-run and long-run Phillips curves, the current rate of inflation and the unemployment rate. b. Suppose the government of Maxistan decreases taxes. In the graph from part (a), identify a point "T" that might reflect the new short-run equilibrium in the economy. c. Describe how the economy in Maxistan would adjust in the long run to the tax decrease from part (b). Describe how this would affect the graph.

Principles of Economics (MindTap Course List)

8th Edition

ISBN:9781305585126

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

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

Section: Chapter Questions

Problem 2PA

See similar textbooks

Similar questions

11. In the Phillips curve equation, which of the following will cause an increase in the current inflation rate? an increase in the expected inflation rate a reduction in the unemployment rate an increase in the markup, m none of the above all of the above
1. As the short-run Phillips curve shifts from D to C to B to A, policymakers face: A. higher than expected inflation rates and lower unemployment rates. B. a lower rate of inflation for any level of unemployment. C. the same tradeoff between inflation and unemployment. D. a higher rate of inflation for any level of unemployment.
D Question 1 The short-run Phillips curve is a curve that shows the relationship, other things being constant, between and O the inflation rate; the unemployment rate O the inflation rate; the nominal interest rate O the unemployment rate; real GDP 0.1 pts O potential GDP; the natural unemployment rate O the inflation rate; the expected inflation rate .
3. In the short run, the Phillips curve suggests a trade-off between: a) Inflation and unemployment b) Economic growth and price stability c) Interest rates and exchange rates d) Fiscal deficits and trade balance
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…
Go to the website of Statistics Canada www statcan ca For each Go to the website of Statistics Canada (www.statcan.ca). For each of the past five years, find the inflation rate as measured by the consumer price index (all items)—sometimes called head-line inflation —and as measured by the CPI excluding food and energy—sometimes called core inflation. Compare these two measures of inflation. Why might they be different? What might the difference tell you about shifts in the aggregate supply curve and in the short-run Phillips curve? Go to the website of Statistics Canada www statcan ca For each
“The more people at work, the higher their bills” The Phillips Curve shows the correlation between unemployment and inflation.” In the light of this statement,(a) Draw the short-run trade-off between inflation and unemployment. How might the Central Bank move the economy from one point on this curve to another? (b) Draw the long-run trade-off between inflation and unemployment. Explain how the short-run and long-run trade-offs are related. (c) Illustrate the effects of the following developments on both the short-run and long-run Phillips curves. Give the economic reasoning underlying your answers.1. A rise in the natural rate of unemployment.2. A decline in the price of imported oil.
2. The Phillips curve in the short run and long run In the year 2023, aggregate demand and aggregate supply in the fictional country of Gurder are represented by the curves AD2023 and AS on the following graph. Suppose the natural rate of output in this economy is $6 trillion. NOTE: OPTIONS FOR BLANKS ARE: 1. The short-run Phillips curve is ______ (a vertical OR a downward sloping OR an upward sloping) 2. Because output at point C is _____ (less than OR greater than OR equal to) the natural rate of output, the unemployment rate associated with outcome C is _____ (less than OR greater than OR equal to) 3. This line is _____ (a vertical OR a downward sloping OR an upward sloping)
13. Suppose the Phillips curve is represented by the following equation: πt − πt−1 = 20 − 2ut. Given this information, which of the following is most likely to occur if the actual unemployment in any period is equal to 6%? the rate of inflation will tend to increase the rate of inflation will be constant the rate of inflation will tend to decrease none of the above
32 There is a new central bank president who wants low inflation much more than the previous president did. According to the Augmented Phillips Curve Model, in this situation, which of the following would be the most help in keep unemployment from rising in the sort run? a.People know the central bank president's true desires and believe he will stay in office for a long time b.Peoples' wage wage contracts are long-lasting. c.People know the central bank president's true desires and believe that he will only be in office for a short time. d.People think that the central bank president's desires are the same as the previous president's and believe that the new president will be in office for a short time. e.People think that the central bank president's desires are the same as the previous president's and believe that the new president will be in office for a
Question 30 The short-run Phillips curve is based on the assumption that there is_____. no relationship between the inflation and unemployment a direct relationship between the inflation and unemployment an inverse relationship between the inflation and unemployment a trade-off between the output and unemployment