Suppose that the Phillips curve is given by +0.1-2 u₂ and expected inflation is given by where 0 is equal to zero and 0.02 and does not change R The economy is initially at the natural rate of unemployment, which is 5%, when the authorities decide to bring the unemployment rate down to 3% and hold it there forever. With 0 equal to zero, this will yield a 6% rate of inflation every year. Now suppose that in year (t+6), 0 changes to 1. 0 might increase in this way because OA government policy would mandate inflationary expectations B. inflation expectations adapt to persistently positive inflation OC inflation expectations change constantly OD inflation expectations always adapt immediately to the last period's inflation. In year (+6), the inflation rate will be % (Ender your response as an integer.) In year (+7), the inflation rate will be % (Enter your response as an integer.) In year (+8), the inflation rate will be%. (Enter your response as an integer.)

Suppose that the Phillips curve is given by +0.1-2 u₂ and expected inflation is given by where 0 is equal to zero and 0.02 and does not change R The economy is initially at the natural rate of unemployment, which is 5%, when the authorities decide to bring the unemployment rate down to 3% and hold it there forever. With 0 equal to zero, this will yield a 6% rate of inflation every year. Now suppose that in year (t+6), 0 changes to 1. 0 might increase in this way because OA government policy would mandate inflationary expectations B. inflation expectations adapt to persistently positive inflation OC inflation expectations change constantly OD inflation expectations always adapt immediately to the last period's inflation. In year (+6), the inflation rate will be % (Ender your response as an integer.) In year (+7), the inflation rate will be % (Enter your response as an integer.) In year (+8), the inflation rate will be%. (Enter your response as an integer.)

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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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%.
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 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?
The Philips curve in an economy is given by a = Επ- 0.5 (u - 6). Assume that the economy starts out at its natural unemployment rate and expected inflation Ex = 5.25%. If output decreases by 2%, using Okun's Law and the Phillips curve relation, what is actual inflation π ?
Suppose πt = πt−1 −2(ut −0.04) is the Phillips Curve equation in the economy. Answer thefollowing questions.a. What is the natural rate of unemployment?b. Graph the short run and the long run relationship between inflation and unemployment.c. How much cyclical unemployment is necessary to reduce inflation by 10 percentagepoint?d. The inflation is running at 12 percent. The Central Bank wants to reduce it to 9 percent.Give two scenarios that will achieve the goal.
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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.
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."
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 identified
1. 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. Graph the short-run tradeoff between inflation and unemployment that this economy faces. Label the point where the economy begins as A. (Be sure to give numerical values for point A.) 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 in part (b), label the point the economy experiences that year as point B.(Be sure to give numerical values.) Unemployment remains at this high level for two years (the initial year described in part (c) and one more), after which it returns to its natural rate. Create a table showing…