Stagflation is the a) theory that people form expectations on the basis of all available information. b) combination of high unemployment rates and low inflation. c) combination of high unemployment rates and high inflation. O d) combination of low unemployment rates and low inflation. O e) theory that people's expectations of future inflation are based on their most recent experiences.

Stagflation is the a) theory that people form expectations on the basis of all available information. b) combination of high unemployment rates and low inflation. c) combination of high unemployment rates and high inflation. O d) combination of low unemployment rates and low inflation. O e) theory that people's expectations of future inflation are based on their most recent experiences.

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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1.(1)Social loss is L=(u-5)^2+(pi-2)^2Philips curve is u=6-(pi-pi_e), where pi is actual inflation rate, pi_e is expected inflation by the public.If gov't is honest, then gov't best choice of pi is: pi=___(2)Social loss is L=(u-5)^2+(pi-2)^2Philips curve is u=6-(pi-pi_e), where pi is actual inflation rate, pi_e is expected inflation by the public. If gov't is honest, then the smallest social loss possible is L=_____
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)?
Assume that next year’s wage rate will be 3 percent higher than this year’s because of inflationary expectations. The actual inflation rate is 4 percent. At the beginning of next year, will the real wage be higher, lower, or the same as today? Explain. Assume that Mark gets a fixed-rate loan from a bank when the expected inflation rate is 3 percent. If the actual inflation rate turns out to be 4 percent, who benefits from the unexpected inflation: Mark, the bank, neither, or both? Explain. How does each of the following changes affect the real gross domestic product and price level of an open economy in the short run? Explain. The depreciation of the country’s currency in the foreign exchange market.
Suppose that an economy has a phillips curve π=π₋₁ -0.5(u-0.08) a) what is the natural rate of unemployement? b) how much cyclical unemployment is necessary to reduce inflation by 5% points? using okun's Law, compute the sacrifice ratio. c) inflation is runnuing 10%. the fed wants to reduce it to 5%. give two scenarios that will achieve that goal.
A. What assumptions did Thomas Sargent make when he claimed that inflation is always and everywhere a fiscal phenomenon?" B. Why is it appropriate in the book's short-term model for the author to use the Phillips Curve as an Aggregate Supply curve? Does it capture the working of the labor market as well as an AS curve based, say, on sticky wages? C. Provide an example of the book's short-run model being based on "microfoundations."
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.
QUESTION 5Which of the following best describes inflation?O a. Economic growth.O b. An increase only in the price of energy.O c. An increase in the overall price level in an economy.O d. Ballooning debt.
Suppose that the Phillips curve is given byπ t = π te − α ( u t − u n ) ,where the estimated value of the natural rate of unemployment, un = 4.5% and α = 0.4. The expectations are myopic (i.e. fully backward), thus πte = πt−1.a) What is the sacrifice ratio in this economy? Explain in words.Suppose that at time t = 0 unemployment is initially equal to the natural rate (i.e. u0 = 4.5%) and π0 = 7.5%. The central bank decides that 7.5% inflation is too high and that starting in year 1 it will decrease inflation to 3.5%.
What causedthe Great Inflation of the 1970s, and why has inflation been so much lowerin recent decades?
Will the following lead to cost-push or demand-pull inflation? (5%)(a) The discovery of a large and rich vein of gold in the banks of Lagan (b) More militancy in wage demands by trades unions (c) A fall in output as a result of a prolonged lockdown of business while the government pays for salaries of furloughed workers (d) A higher tax on microchips (e) Increasing industrial concentration leading to oligopolistic industrial structures
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.
Suppose that an economy has the Phillips curve π = π−1 − 0.5( u − 0.06). a. What is the natural rate of unemployment? b. Graph the short-run and long-run relationships between inflation and unemployment. c. How much cyclical unemployment is necessary to reduce inflation by 5 percentage points? Using Okun’s law, compute the sacrifice ratio. d. Inflation is running at 10 percent. The Fed wants to reduce it to 5 percent. Give two scenarios that will achieve that goal.