Question 2 True/False/It-depends For this question I want you to explain why you answered True, False, or It depends. An answer with no explanation will be worth zero. a) The original Phillips curve is the negative relation between unemployment and inflation that was first observed in the United Kingdom. This relation has proven to be very stable across countries and over time. b) When inflation expectations are anchored, the Phillips curve relation is a relation between the change in the inflation rate and the unemployment rate. c) The natural rte of unemployment is the same in all countries. Hint: Think about the our model of the labour market.

Question 2 True/False/It-depends For this question I want you to explain why you answered True, False, or It depends. An answer with no explanation will be worth zero. a) The original Phillips curve is the negative relation between unemployment and inflation that was first observed in the United Kingdom. This relation has proven to be very stable across countries and over time. b) When inflation expectations are anchored, the Phillips curve relation is a relation between the change in the inflation rate and the unemployment rate. c) The natural rte of unemployment is the same in all countries. Hint: Think about the our model of the labour market.

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter17: The Trade-off Between Inflation And Unemploy

Section: Chapter Questions

Problem 6DQ

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Using the inflation-unemployment version of the Phillips curve with adaptive expectations, ifaggregate demand increasesA)workers will realize that inflation has changed in the long run but not in the short run.B)the SRPC will immediately shift to the right as workers expect higher pricesC)workers will mistakenly work less, resulting in a decrease in inflation and increase inunemploymentD)actual inflation will be less than expected inflation, resulting in workers mistakenly workingmore and unemployment falling.
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)?
According to Mankiw Chapter 22, Friedman and Phelps believed or argued all of the following except:(a) monetary policy could lower unemployment by increasing inflation, but only in the short run.(b) monetary policymakers faced a horizontal long-run Phillips curve(c) the concepts of “expected inflation” and the “natural-rate hypothesis” were critical to understanding thetrade-offs between inflation and unemployment.(d) monetary authorities control nominal magnitudes but cannot affect real variables(e) it is dangerous to view the Phillips curve as a menu of options available to policymakers
Assume that an economy is governed by the Phillips curve π= πe – 0.5(u – 0.06), where π= (P – P–1)/P–1, π e = (P e – P–1)/P–1, and 0.06 is the natural rate of unemployment. Further assume π e = π–1. Suppose that, in period zero, π= 0.03 and πe = 0.03—that is, that the economy is experiencing steady inflation at a 3-percent rate. a. Now assume that the government decides to impose whatever demand is necessary to cut unemployment to 0.04. Suppose the government follows this policy for periods 1 through 5. Create a table of π and πe for these five periods. b. Assume that, for periods 6 through 10, the government decides to hold unemployment at 0.06. Create another table of π and πe for these five periods. Is there any reason to expect the inflation rate to go back to 0.03? c. If the government persisted in its behavior under part a, do you think the public would continue for long forming expectations according to πe = π–1? Why?
Consider the expectations augmented Phillips curve model. Suppose that we are starting from long - runequilibrium with a central bank which cares a lot about unemployment and relatively little about inflation.a) Draw and carefully label the graph of this situation. b) Explain where the Phillips curve comes from inthis model. c) Explain why the equilibrium you specify is the only Nash equilibrium. d) Now suppose that anew central bank governor is appointed who cares a lot about inflation and relatively little aboutunemployment. Redraw your graph twice, once showing what happens if private agents know the newgovernor's preferences and again showing what happens if private agents mistakenly believe that thenew governor has the same preferences as the old governor. Explain clearly why the outcome is differentin the two cases.
The effect of expectations on the Phillips curve is considered a Phelps’s primary contribution. We can use a modified version of the Phillips curve to illustrate the point that Phelps was trying to make. The key difference is that the position of this new kind of curve changes when the inflation rate that people expect changes. When actual inflation changes and expected inflation stays the same, you move along the curve. But when expected inflation changes, the entire curve shifts. Since expectations shift this curve, economists call it an expectations-augmented Phillips curve. The following graph shows a Phillips curve for a hypothetical economy where the natural rate of unemployment is 8%. Initially, the expected inflation rate equals the actual inflation rate of 4%. Use the Phillips curve on the graph to answer the questions that follow. Consider a scenario where the inflation rate unexpectedly rises from 4% to 5%. Wages rise to match the new level of inflation. Workers believe that…
Only typed answer Consider the Phillips curve shown here. In region B: a. inflation equals expected inflation. b. inflation rises above expected inflation. c. there is insufficient demand. d. the output gap is negative.
(i) Discuss the Lucas Critique. (ii) With the help of a diagram, show the implications of Rational Expectations for the Phillips curve.
. Explain how the original Phillips curve was transformed into the expectations augmented Phillips curve. Using the latter, describe why any expansionary policy would not be effective in the long run and move the macro-economy back to the Natural Rate of Unemployment (NRU).
Using the Frieman-Phelps expectations-augmented Phillips curve, if actual and expected inflationare equal to each other, thenA)workers are correctly forecasting inflation and the economy is in long run equilibriumB)the policymaker needs to pursue expansionary policy to create more output.C)in the long run workers will adjust their expectations, resulting in a business cycle in the longrun.D)the economy is in an expansion above the natural rate of output.
Given the Phillips Curve model below, suppose the economy is in an inflationary gap. and policy-makers (Fed or President & Congress) decide to intervene. If policy-makers decide to intervene, what type of “policy” will they advocate? With the use of policy, the economy will move from point _____ to point _____.
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?