Solve the following problem: The Phillips curve of an economy is defined by the following relationship: T = T + 0,08 + 0,1m – 0,5u̟ In which m is the mark-up of prices over wages. Initially the value of the mark-up is 20%, but after an oil price shock, it rises to 40% (period t+1). (a). Find the Phillips curve and the natural rate of unemployment before the oil shock. How does the natural rate of unemployment change after the shock? (b). If expected inflation is given by T = Ont-1 with 0 = 1 ,where initially actual inflation was 2% and rose to 4% in period t, then what was the unemployment rate in the period? (C). How does your answer in (b) change after the oil shock? What happens to inflation in periods t+1, t+2 and t+3, if the authority wanted to keep unemployment at the level found in period t?

Solve the following problem: The Phillips curve of an economy is defined by the following relationship: T = T + 0,08 + 0,1m – 0,5u̟ In which m is the mark-up of prices over wages. Initially the value of the mark-up is 20%, but after an oil price shock, it rises to 40% (period t+1). (a). Find the Phillips curve and the natural rate of unemployment before the oil shock. How does the natural rate of unemployment change after the shock? (b). If expected inflation is given by T = Ont-1 with 0 = 1 ,where initially actual inflation was 2% and rose to 4% in period t, then what was the unemployment rate in the period? (C). How does your answer in (b) change after the oil shock? What happens to inflation in periods t+1, t+2 and t+3, if the authority wanted to keep unemployment at the level found in period t?

MACROECONOMICS FOR TODAY

10th Edition

ISBN:9781337613057

Author:Tucker

Publisher:Tucker

Chapter17: The Philips Curve And Expetactions Theory

Section: Chapter Questions

Problem 2SQ

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For this question, assume that the Phillips curve equation is represented by the following equation: πt - πt-1 = (m + z) - αut. A reduction in the unemployment rate will cause A) a reduction in the markup over labor costs (i.e., a reduction in m). B) an increase in the markup over labor costs. C) an increase in the inflation rate over time. D) a decrease in the inflation rate over time. E) none of the above
The following graph plots the long-run Phillips curve (LRPC) and short-run Phillips curve (SRPC1SRPC1) for an economy currently experiencing long-run equilibrium at point A (grey star symbol). Which of the following is true along SRPC1SRPC1? -The actual unemployment rate is 6%. -The expected inflation rate is 5%. -The actual inflation rate is 5%. -The natural rate of unemployment is 3%. Suppose that the central bank for this economy suddenly and unexpectedly decreases the money supply in an effort to reduce inflation. As a result of this unanticipated policy action, actual inflation falls to 3%. On the previous graph, use the black point (plus symbol labeled "B") to illustrate the short-run effects of this policy. Suppose that now, after a period of 3% inflation, households and firms begin to expect that the inflation rate will persist at the level of 3%. On the previous graph, use the purple line (diamond symbol) to draw SRPC2SRPC2, the short-run Phillips curve that is…
The following graph plots the long-run Phillips curve (LRPC) and short-run Phillips curve (SRPC1SRPC1) for an economy currently experiencing long-run equilibrium at point A (grey star symbol). Which of the following is true along SRPC1SRPC1? -The actual unemployment rate is 6%. -The expected inflation rate is 5%. -The actual inflation rate is 5%. -The natural rate of unemployment is 3%. Suppose that the central bank for this economy suddenly and unexpectedly decreases the money supply in an effort to reduce inflation. As a result of this unanticipated policy action, actual inflation falls to 3%. On the previous graph, use the black point (plus symbol labeled "B") to illustrate the short-run effects of this policy. Suppose that now, after a period of 3% inflation, households and firms begin to expect that the inflation rate will persist at the level of 3%. On the previous graph, use the purple line (diamond symbol) to draw SRPC2SRPC2, the short-run…
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The period from the late 1990s to the winter of 2000 was marked by falling unemployment rates and falling inflation rates as well. How does economic theory explain this apparent violation of the Phillips curve model?
Derive the original Phillips curve and answer the following questions:a) What effect does an increase in the expected price level have on the price level?b) What effect does an increase in the unemployment rate have on the price level?c) What effect does a decrease in business competition have on inflation?d) What is the effect of liberalizing foreign trade?e) What effect does the formation of trade unions have?
. 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).
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For each of the following scenarios, illustrate the effects of the development on both the short-run and long-run Phillips curves (SRPC and LRPC, respectively). 1. There is a rise in the price of imported oil. 2. There is a fall in government spending.