Macroeconomics
4th Edition
ISBN: 9780393602487
Author: Jones, Charles I.
Publisher: W. W. Norton & Company
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Question
Chapter 9, Problem 3E
To determine
The impact of stimulating the economy in order to keep the output above potential level.
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Students have asked these similar questions
Suppose the Federal Reserve sets the real interest rate to 1.5%.
Moreover, assume that there are no demand shocks, that b = 2.5, and
that F = 0.02. If the resulting change in the inflation rate is +0.375
percentage points, what is the value of the parameter D? (Round to the
nearest hundredth.)
Hint: Use the IS and Phillips Curves to calculate your answer.
MAKE YOUR OWN QUESTION
Consider an economy on its long-run path. The inflation is 10%. Suppose the slope of the Phillips
curve is v=
. In order to bring the inflation rate down from 10% to %, GDP should fall below
its potential value by %.
Choose your own values to answer this question. Justify carefully your answer.
The Phillips curve represents the relationship between unemployment and inflation. You are required to think about the impact on the economy of movements along the curve. If the unemployment rate in the economy is steady at 4 percent per year, how does the short-run Phillips curve predict that the inflation rate will be changing, if at all? What will happen if the unemployment rate now rises to 7 percent per year? Assume there are no changes to inflation expectations. Provide an appropriate graph to support your discussion.
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Similar questions
- Overstimulating the economy: Suppose the economy today is producing output at its potential level and the inflation rate is equal to its long-run level, with π = 2%. What happens if policymakers try to stimulate the economy to keep output above potential by 3% every year? How does your answer depend on the slope of the Phillips curve?arrow_forwardAn 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. 1. What is the natural rate of unemployment for this economy? 2. Graph the short-run tradeoff between inflation and unemployment that this economy faces. Label the point where the economy begins as A. 3. 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, label the point the economy experiences that year as point B.arrow_forwardThe Short-Run Phillips Curve given by = E (T) 0.4 (u - 10) + v Suppose that the economy has Rational expectations and no inflation shocks. If the central bank credibly announces that inflation will go down by 3.3 percentage points a year from today, what is the unemployment rate one year from now? Round your answer to the nearest two decimal place. Write your answer in percentage terms so if your answer is 10%, write 10.arrow_forward
- Prior to the mid-1970s, many economists thought a higher rate of unemployment would reduce the inflation rate. Why? How does the modern view of the Phillips curve differ from the earlier view?arrow_forwardDoes the Phillips curve have a positive or negative slope? Explain how this slope is derived. When will an increase in aggregate demand not result in lower unemployment rates in the short run?arrow_forwardThe Short-Run Phillips Curve given by T = E (x) – 0.4 (u – 10) + v Suppose that the economy has adaptive expectations and no inflation shocks. If inflation goes down by 3.3 percentage points a year from today, what is the unemployment rate one year from now? Round your answer to the nearest two decimal place. Write your answer in percentage terms so if your answer is 10%, write 10.arrow_forward
- Draw a Phillips curve graph here that shows a natural rate of unemployment of 4% and a current inflation rate of 2%. Make sure your lines and axes are labeled and your graph is complete! Use your knowledge of The Phillips Curve to answer the following questions. The threat of future inflation: makes people reluctant to loan money for long periods. makes people eager to loan money for long periods. has no effect on loaning money. increases the value of money paid back in the future. makes people reluctant to borrow money for long periods. According to the short-run Phillips Curve, there is a trade-off between: interest rates and inflation. the growth of the money supply and interest rates. unemployment and economic growth. inflation and unemployment. economic growth and interest rates. Which of the following is true of the long-run Phillips curve? it shows there is a trade-off between unemployment and inflation. it is positively sloped when the inflation rate exceeds…arrow_forwardAs with demand and supply analysis, changes in the economy can cause both shifts of and movements along the short-run Phillips curve. Which of the following would cause a shift of the short-run Phillips curve? Check all that apply. An increase in government spending A decrease in short-run aggregate supply An increase in the expected inflation ratearrow_forwardTrue or false? An increase in inflation expectations shifts the short-run Phillips curve right and has no effect on the long-run Phillips curve.arrow_forward
- According to the St. Louis Federal Reserve the natural unemployment rate is 4.42 percent (Q4 2023 ) and the U.S. Bureau of Labor Statistics (BLS) estimates the U.S. unemployment rate (U3, October 2023 B) to be 3.9 percent. If you expect unemployment to continue to fall the short-run Phillips curve would predict: OA decrease in the inflation rate. An increase in the inflation rate. ○ A decrease in the unemployment rate. ○ An increase in the unemployment rate.arrow_forwardSuppose that the government is considering enacting an expansionary policy in 2023 that would shift aggregate demand in 2024 from ADAADA to ADBADB. This would cause a (move along , shift of) the short-run Phillips curve, resulting in (increase, decrease) in the inflation rate and (increase, decrease) in the unemployment rate.arrow_forwardTrue or false? Phillips curve represents a structural relationship between unemployment and inflation that never changes.arrow_forward
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