MACROECONOMICS (LL)
21st Edition
ISBN: 9781260186949
Author: McConnell
Publisher: MCG
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Question
Chapter 18, Problem 4RQ
To determine
Cost push inflation and demand pull inflation.
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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.
3) Suppose that on January 1, 2019 a bank lends $20,000 to a person. The bank and the individual both agree that the real interest rate charged on the loan should be 10% and the loan is going to be totally paid ($20,000 plus interest), in a one-time payment, on December 31, 2020. Suppose the two parties to this transaction can perfectly foresee what the inflation rate for this period is going to be. Given this information, what is the nominal rate the Bank has to charge on this loan? Assume that the CPI is computed at the beginning of each year.
15. Suppose that the relationship between inflation rate (π) and unemployment rate (u) is described by the following equation:
πt – πte = (m + z) – αut
where m = 0.05, z = 0.04, and α = 2. In this economy, the authorities keep unemployment rate at 4% forever.
a. If the modified Philips curve describes the relationship between π and u correctly, how should “πte” be specified? Rewrite the equation using this specification. Assume that πt–1 = 1%. Compute πt, πt+1, and πt+2.
b. Do you believe the answer in part (a)? Why or why not?
c. Derive the natural rate of unemployment.
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- Use Table 8P - 5 to calculate core and headline inflation in each time frame relative to the base year, assuming that each category is weighted equally in the calcula tion of headline inflation . [LO 8.2 , 8.4 a. 2012 to a base year . b . 2016 to a base year . . 2012 to 2016.arrow_forwardjust do 4 3) Suppose that on January 1, 2019 a bank lends $20,000 to a person. The bank and the individual both agree that the real interest rate charged on the loan should be 10% and the loan is going to be totally paid ($20,000 plus interest), in a one-time payment, on December 31, 2020. Suppose the two parties to this transaction can perfectly foresee what the inflation rate for this period is going to be. Given this information, what is the nominal rate the Bank has to charge on this loan? Assume that the CPI is computed at the beginning of each year. Nominal interest rate refers to the interest rate before taking inflation into account. Nominal can also refer to the advertised or stated interest rate on a loan, without taking into account any fees or compounding of interest. Therefore the interest charged by the bank is 10% only with no adjustments of inflation rate over the year. The amount of money charged by the bank as interest in one year equals to ; 20000$× 10/100= 2000$.…arrow_forwardSuppose that consumer spending initially rises by $5 billion for every 1 percent rise in household wealth and that investment spending initially rises by $20 billion for every 1 percentage point fall in the real interest rate. Also assume that the economy's multiplier is 4. If household wealth falls by 6 percent because of declining house values, and the real interest rate falls by 2 percentage points, in what direction and by how much will the aggregate demand curve initially shift at each price level? In what direction and by how much will it eventually shift?arrow_forward
- 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=_____arrow_forward7. Suppose that people expect inflation to equal 3%, but in fact, prices rise by 5%. Describe how this unexpectedly high inflation rate would help or hurt the following: A.) the governmentB.) a homeowner with a fixed-rate mortgageC.) a union worker in the second year of a labor contractD.) a college that has invested some of its endowment in government bondsarrow_forwardPlease just do question 4 please 3) Suppose that on January 1, 2019 a bank lends $20,000 to a person. The bank and the individual both agree that the real interest rate charged on the loan should be 10% and the loan is going to be totally paid ($20,000 plus interest), in a one-time payment, on December 31, 2020. Suppose the two parties to this transaction can perfectly foresee what the inflation rate for this period is going to be. Given this information, what is the nominal rate the Bank has to charge on this loan? Assume that the CPI is computed at the beginning of each year. According to US inflation data: The historical average CPI for 2019 is - 255.657 The historical average CPI for 2019 is - 258.811 The inflation rate during the period is: (258.811/255.657 -1) *100 = 1.233% Real Interest Rate = Nominal Interest Rate – Expected Inflation Nominal Interest Rate = Real Interest Rate+ Expected Inflation Nominal Interest Rate = 10% + 1.23% Nominal Interest Rate…arrow_forward
- 13. Which of the following cannot be used to measure inflation?a) GDP deflationb) Expenditure methodc) Producer price indexd) Consumer price indexWhich of the following equations in correct?a) Nominal interest rate = Real interest rate-Inflationb) Real interest rate = Nominal interest rate + inflationc) Real interest rate = Nominal interest rate x inflationd) Real interest rate = Nominal interest rate-inflationarrow_forwardIn what situation would the expected real interest rate be negative? O The nominal interest rate is less than the expected inflation rate. O The nominal interest rate is greater than the real interest rate. O The expected inflation rate is greater than the actual inflation rate. O The expected real interest is greater than the expected inflation rate. O The actual inflation rate is greater than the nominal interest rate. Note:- Please avoid using ChatGPT and refrain from providing handwritten solutions; otherwise, I will definitely give a downvote. Also, be mindful of plagiarism. Answer completely and accurate answer. Rest assured, you will receive an upvote if the answer is accurate.arrow_forwardFor each of the annual inflation rates given in the following table, first determine the new price of a comic book, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Eileen's deposit after one year in the first row of the table for each inflation rate. Finally, enter the value for the real interest rate at each of the given inflation rates. Hint: Round your answers in the first row down to the nearest comic book. For example, if you find that the deposit will cover 20.7 comic books, you would round the purchasing power down to 20 comic books under the assumption that Eileen will not buy seven-tenths of a comic book.arrow_forward
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