Macroeconomics
21st Edition
ISBN: 9781259915673
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Question
Chapter 18, Problem 8RQ
To determine
Impact of adverse aggregate supply shock on the inflation rate and unemployment rate.
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Suppose 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?
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.
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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- 42. Suppose that there is a temporary fall in aggregate supply due to a drought. Whathappens in the long-run?(A) Higher prices cause permanent tensions, leading long-run aggregate supply to shiftleft, resulting in a lower natural rate of output.(B) Over time, as the drought conditions fade, aggregate supply rises and returns tothe original natural rate of output.(C) Aggregate demand shifts right, so that prices are higher but long-run output isunchanged.(D) If the person you’re dating enjoys Taylor Swift, dump them immediatelyarrow_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. a. If household wealth falls by 5 percent because of declining house values, and the real interest rate falls by 3 percentage points, in what direction and by how much will the aggregate demand curve initially shift at each price level?arrow_forwardIf the inflation rate is 3 percent and the nominal interest rate is 8 percent, how much is the after-tax real interest rate if the government imposes a 20 percent interest income tax? O a. 3.4 percent O b. 4 percent O c. None of the above O d. 5.4 percent.arrow_forward
- Using the data in Table 8P - 3 , calculate the CPI and the inflation rate in each year, using 2010 as a base year . [LO 8.2arrow_forward4. Suppose that people expect inflation to equal 3 percent, but in fact prices rise by 5 percent. Indicate whether this unexpected higher rate of inflation would help or hurt each of the following groups. a homeowner with a fixed-rate mortgage. a union worker with a fixed labor contract a company that has invested some of its endowment in a government bonds which pay a fixed rate of return. 5. Indicate how each of the following events would affect the aggregate demand AD curve: a short-run decrease in the price level an increase in consumer confidence on the price level and real GDP an increase in government purchasesarrow_forward
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