Problem 1. Country A has the following Philips Curve: π- Eπ- 0.75 (u-0.05) a) What is the natural rate of unemployment for Country A? b) Assume Eπ=0.03, graph the short-run and long-run relationshipbetween inflation and unemployment. c) Assume that the social cost of unemployment and inflation isdescribed by the following loss function: L = u +0.05m² The central bank would like to minimize this loss. Calculate the optimal level of inflation that minimizes this loss function. d) i) Define the sacrifice ratio. ii) Assume that the inflation rate in both country A and country B ishigher than the optimal inflation rate you obtained in part c). The public in country A believes that their policymakers are committed to targeting the optimal inflation rate you obtained in part c), while the public in country B is skeptical about their policymakers' intention to reduce inflation and achieve the optimal inflation rate. According to the rational-expectations approach, the sacrifice ratio will be lower in country A than in country B. Explain why this might be true.

Problem 1. Country A has the following Philips Curve: π- Eπ- 0.75 (u-0.05) a) What is the natural rate of unemployment for Country A? b) Assume Eπ=0.03, graph the short-run and long-run relationshipbetween inflation and unemployment. c) Assume that the social cost of unemployment and inflation isdescribed by the following loss function: L = u +0.05m² The central bank would like to minimize this loss. Calculate the optimal level of inflation that minimizes this loss function. d) i) Define the sacrifice ratio. ii) Assume that the inflation rate in both country A and country B ishigher than the optimal inflation rate you obtained in part c). The public in country A believes that their policymakers are committed to targeting the optimal inflation rate you obtained in part c), while the public in country B is skeptical about their policymakers' intention to reduce inflation and achieve the optimal inflation rate. According to the rational-expectations approach, the sacrifice ratio will be lower in country A than in country B. Explain why this might be true.

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter10: Aggregate Supply

Section: Chapter Questions

Problem 1.1P

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