Suppose that, in an attempt to combat severe inflation, the government decides to decrease the amount of money in circulation in the economy. This monetary policy the economy's demand for goods and services, leading to product prices. In the short run, the change in prices induces firms to produce goods and services. This, in turn, leads to a level of unemployment. In other words, the economy faces a trade-off between inflation and unemployment: Lower inflation leads to unemployment.
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- 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%.Julia is a macroeconomist who works as a policy maker for a European government. She believes that policy makers can choose from a menu of inflation and unemployment combinations and that the non-accelerating inflation rate of unemployment (NAIRU) does not exist. What school of thought best matches Julia's viewpoint? 1)Hysteresis Keynesian 2)Earlier monetarist 3)Persistence Keynesian 4)Old Keynesian 5)New classical and OECD economistAssume that a 1% change in the inflation rate causes a 1% increase in nominal interest rates, which in turn causes a 1% drop in real growth the following year. During the latter half of the 1990s, real growth averaged about 4%. Calculate how much inflation would have to increase for the following to happen, using Okun’s Law. (A) A 1% increase in the unemployment rate. (B) A big enough change to cause a ‘‘typical’’ recession, where real GDP declines 2%. (C) Suppose real growth slows down to 2½% because of a change in consumer and business sentiment. How much would the unemployment rate change each year?
- Two main macroeconomic concerns are the problems of inflation andunemployment.a. What are the social costs of inflation? Explain TWO of them? b. What is natural rate of unemployment? Explain the TWO main causesof natural rate of unemployment. With reference specifically to ONEof these causes, suggest ONE practical government policy that reducesthe natural rate of unemployment.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.What causedthe Great Inflation of the 1970s, and why has inflation been so much lowerin recent decades?
- Suppose that people expect inflation to equal 3 percent, but in fact, prices rise by5 percent. Describe how this unexpectedly high inflation rate would help or hurtthe following: (4)1.the government2. a homeowner with a fixed-rate mortgage3.a union worker in the second year of a labor contract4. a college that has invested some of its endowment in government bondsSuppose that people expect inflation to be 3 percentbut that, in fact, prices rise by 5 percent. Describehow this unexpectedly high inflation would help orhurt the following:a. the governmentb. a homeowner with a fixed-rate mortgagec. a union worker in the second year of a laborcontractd. a college that has invested some of its endowmentin government bondsSuppose that in 2019 there is a sudden, unanticipated burst of inflation. Consider the situations faced by the following individuals. Who gains and who loses? Explain why?a. A homeowner whose wages will keep pace with inflation in 2019 but whose monthly mortgage payments to a savings bank will remain fixedb. An apartment landlord who has guaranteed to his tenants that their monthly rent payments during 2019 will be the same as they were during 2018c. A banker who made an auto loan that the auto buyer will repay at a fixed rate of interest during 2019d. A retired individual who earns a pension with fixed monthly payments from her past employer during 2019
- Assume that the cconomy of Country X his an actual unemployment rate of 7%, a natural rate of unemployment of 5%, and an inflation rate of 3%. Using the numerical values given above, draw a correctly labeled graph of the short-run and long-run Phillips curves. Label the current short-run equilibrium as point B. Plot the numerical values above onthe graph. Assume that the government of Country X takes no policy action to reduce unemployment. In the long run, will each of the following shill to the right, shift to the left, or remain the same? (i) Short-run aggregate supply curve. Explain. (ii) Long-run Phillips curve Identify a fiscal policy action that could be used to reduce the unemployment rate in the short run. Draw a correctly labeled graph of aggregate demand and short-run aggregate supply, and show the impact on the equilibrium price level and real gross domestic product (GDP) of the fiscal policy action identified1. In an OLG model with money: Each gen picks 12 banans when young, 4 bananas when old. Central bank prints out 2 units of money, given to gen 0 for free. A. In equilibrium, 1 money = ______ bananas. B. The level of employment is _____ in each period. (how many people are employed each period) C. The unemployment rate in this economy is ______%. what other information do you need? I dont have any other information, this is all that I was given.An economy has the following equation for the Phillips Curve: π = Eπ − 0.5(u − 6)People form expectations of inflation by taking a weighted average of the previous two years of inflation: Okun’s law for this economy is: Eπ = 0.7π−1 + 0.3π−2 (Y −Y−1)/(Y-1)=3.0−2.0(u−u−1) Th economy begins at its natural rate of unemployment with a stable inflation rate of 5 percent. 1. What is the natural rate of unemployment for this economy? 2. Graph the short-run tradeoff between inflation and unemployment that this economy faces. Label the point where the economy begins as A. 3. A fall in aggregate demand leads to a recession, causing the unemployment rate to rise 4 percentage points above its natural rate. On your graph, label the point the economy experiences that year as point B.