Time Inconsistency of Monetary Policy (All notations are the same as used in the class) Suppose that the Central Bank of Avocado Republic is facing the following Phillips Curve: * = n - 0.4 (u - u,) The Central Bank announces a monetary policy consistent with 1% inflation. The natural rate of unemployment (un) is assumed to be 3%. a. Assume that market participants believe in the Central Bank and form the expected inflation equal to 1% (r = 1%) . If the Central Bank follows through with its announced policy, what are the actual inflation rate and the unemployment rate? %3D ;u = b. Assume that the Central Bank weighs more on unemployment than inflation. So, to achieve an unemployment rate at 1 percentage point below the natural rate, what rate of inflation is the Central Bank willing to accept? To achieve an unemployment rate at u = the Central Bank is willing to accept = Do you think people will still believe in the Central Bank's announced policy? (Yes or No)

Time Inconsistency of Monetary Policy (All notations are the same as used in the class) Suppose that the Central Bank of Avocado Republic is facing the following Phillips Curve: * = n - 0.4 (u - u,) The Central Bank announces a monetary policy consistent with 1% inflation. The natural rate of unemployment (un) is assumed to be 3%. a. Assume that market participants believe in the Central Bank and form the expected inflation equal to 1% (r = 1%) . If the Central Bank follows through with its announced policy, what are the actual inflation rate and the unemployment rate? %3D ;u = b. Assume that the Central Bank weighs more on unemployment than inflation. So, to achieve an unemployment rate at 1 percentage point below the natural rate, what rate of inflation is the Central Bank willing to accept? To achieve an unemployment rate at u = the Central Bank is willing to accept = Do you think people will still believe in the Central Bank's announced policy? (Yes or No)

MACROECONOMICS FOR TODAY

10th Edition

ISBN:9781337613057

Author:Tucker

Publisher:Tucker

Chapter17: The Philips Curve And Expetactions Theory

Section: Chapter Questions

Problem 12SQ

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