Suppose that the Phillips curve is given by π 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%.

Suppose that the Phillips curve is given by π 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%.

MACROECONOMICS FOR TODAY

10th Edition

ISBN:9781337613057

Author:Tucker

Publisher:Tucker

Chapter17: The Philips Curve And Expetactions Theory

Section: Chapter Questions

Problem 1SQP

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Assume that the federal government increases unemployment compensation, which of the following is the correct adjustment on the Phillips Curve Graph?
If a Phillips curve shows that unemployment is high and inflation is low in the economy, then that economy: A) is producing at its potential GDP. B) is producing at a point where output is more than potential GDP. C) is producing at its equilibrium point. D) is producing at a point where output is less than potential GDP.
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
What is true along the long-run Phillips curve? A. A labor shortage exists. B. A tradeoff exists between the inflation rate and the unemployment rate. C. The economy is at full employment. D. The inflation rate equals the expected inflation rate and any unemployment rate is possible.
On a given short-run Phillips curve which of the following is held constant? a. the level of GDP b. employment c. the unemployment rate d. expected inflation
Consider the short-run Phillips curve. If the actual unemployment rate falls below the full employment rate of unemployment, it should be expected that: the Phillips curve would shift downwards wages would fall the natural rate of unemployment would fall the inflation rate would increase
Consider the original presentation of the Phillips Curve, with inflation on the vertical axis and unemployment on the horizontal axis. Which of the following could NOT shift this Phillips Curve upward? an increase in the price of inputs used in production expected higher prices in the future/higher inflation an increase in the average wages of workers an improvement in production technology
True, False, or uncertain: If people assume that inflation will be the same as last year's inflation, the Phillips curve relation will be a relation between the change in the inflation rate and the unemployment rate.
According to the Phillips curve, the inflation rate depends on all of these EXCEPT: a. previously expected inflation. b. an exogenous supply shock. c. the real interest rate. d. the deviation of output from its natural rate.
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?
If workers accurately predict the rate of inflation, is there a short-run trade-off between inflation and unemployment, as predicted by the Phillips curve? Why or why not?
Which of the following statements is correct? A) The short run Phillips curve is negatively sloped B) There is no inflation when the unemployment rate is zero C) The Phillips curve shows a negative correlation between the unemployment rate and GDP growth D) The short run Phillips curve is positively sloped