9 Consider the AD-AS model: (a) Explain with your own words what is the Phillips Curve. (b) Starting from the price and wage setting equations derive an expression for the Phillips Curve. (c) Explain the role of expectations in the Phillips Curve. Compare the cases of adaptive expectations and rational expectations and explain what are the implications for the monetary policy maker.Consider the AD-AS model: (a) Explain with your own words what is the Phillips Curve. (b) Starting from the price and wage setting equations derive an expression for the Phillips Curve. (c) Explain the role of expectations in the Phillips Curve. Compare the cases of adaptive expectations and rational expectations and explain what are the implications for the monetary policy maker.

9 Consider the AD-AS model: (a) Explain with your own words what is the Phillips Curve. (b) Starting from the price and wage setting equations derive an expression for the Phillips Curve. (c) Explain the role of expectations in the Phillips Curve. Compare the cases of adaptive expectations and rational expectations and explain what are the implications for the monetary policy maker.Consider the AD-AS model: (a) Explain with your own words what is the Phillips Curve. (b) Starting from the price and wage setting equations derive an expression for the Phillips Curve. (c) Explain the role of expectations in the Phillips Curve. Compare the cases of adaptive expectations and rational expectations and explain what are the implications for the monetary policy maker.

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter16: Macro Policy Debate: Active Or Passive?

Section: Chapter Questions

Problem 4.5P

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An economy is currently in a recession. (a) Draw a single correctly labeled graph with both the short-run and long-run Phillips curves. Label the current short-run equilibrium as point X. (b) Is the expected inflation rate greater than, less than, or equal to the actual inflation rate? (c) Will borrowers on fixed-rate loans benefit from the situation that you identified in part (b)? Explain. (d) Assume the government budget is balanced. In the absence of any discretionary policy action, will the government budget move into surplus, deficit, or remain in balance? Explain. (e) On your graph in part (a), show how the economy will adjust in the long run in the absence of any discretionary policy action. (f) Now assume instead the government increases spending without changing taxes to close the recessionary gap. What effect will this policy have on the national debt? (g) Draw a correctly labeled graph of the loanable funds market and show the effect of the change in the national debt…
3) Suppose that a fall in consumer spending causes a recession a)Illustrate the immediate changes in the economy using both an aggregate-supply/aggregate-demand diagram and a Phillips-curve diagram.On both graphs, label the initial long-run equilibrium as point A and the resulting short-run equilibrium as point B.What happens to inflation and unemployment in the short-run b)Now suppose that over time expected inflation changes in the same direction that actual inflation changes.What happens to the position of the short-run Phillips curve? After the recession is over, does the economy face a better or worse set of inflation-unemployment combinations? Explain.
5. Consider the standard Phillips curve. Select all the correct statements: (a) A positive aggregate demand shock will lead to an upward shift in the Phillips curve. (b) Changes in short-run output will lead to movements along the Phillips curve. (c) A negative inflation shock will lead to movements along the Phillips curve. (d) A shock to the price of oil will lead to a shift in the Phillips curve. (e) The inflation rate will always be equal to zero when short-run output is equal to zero.
04:11 Expert Q&A all Done 2. (a) Starting from the IS equation, derive an expression for the aggregate demand curve. (b) Starting from the wage and price setting problems, derive a general expression of aggregate supply and the Phillips Curve. (c) Discuss how the past inflation dynamics might affect the Phillips Curve form under adaptive expectations. (d) What changes in (c) if we consider rational expectations?
19) The occurrence of financial crowding out implies that: Short-run fiscal expansion increases the size of the public sector Long-run growth is adversely affected by public spending Domestic banks benefit at the expense of foreign banks The long-run Phillips curve is vertical Which of the following statements are true? Only Statement (1) is correct Statements (1) and (3) are correct (3) Statements (1) and (2) are correct (4) Statements (2) and (4) are correct
Suppose that a fall in consumer spending causes a recession. a. Illustrate the changes in the economy using both an aggregate supply/aggregate demand diagram and a Phillips curve diagram. What happens to inflation and unemployment in the short run? (5%) b. Now suppose that over time, expected inflation changes in the same direction that actual inflation changes. What happens to the position of the short-run Phillips curve? After the recession is over, does the economy face a better or worse set of inflation– unemployment combinations? (5%)
2. Short-run Aggregate Supply and the Phillips Curve Suppose that the economy is populated by two types of firms, firms with sticky prices and firms with flexible prices. These firms set their prices according to p° =EP, p =P+a(Y – Y), where the superscript s and f denotes sticky and flexible price firms. Suppose the fraction of firms with sticky prices is equal to 6, meaning that 1 -0 firms have flexible prices. Further, let a = 2 and 0 = 0.75. (a) Derive the short-run aggregate supply curve. Suppose that the natural rate of out- put is given by Ỹ = 100 and EP = 40. Plot the SRAS for output levels ranging from 0 to 200. %3D (b) Suppose that new technology reduces the fraction of firms with sticky prices from 0 = 0.5. Is the new short-run aggregate supply curve steeper or flatter than the curve found in (a)? Plot this curve in the same diagram for the same values of P. (c) Suppose Okun's Law obeys a(Y - Y) Assume that the fraction of sticky price firms remains at 0 this Phillips curve.…
Question 1 (a) Consider an AD-AS model with Static Expectations. Show how changes in monetary policy generate short-run movements in output. (b) Consider an AD-AS model with Rational Expectations. Show how changes in the unanticipated component of monetary policy generate short-run movements in output. (c) Explain how overlapping wage contracts generate persistence in output when there are monetary policy shocks.
15 Suppose that an economy has the Phillips curve: n = n(-1)-0.5 (u - 0.05) a. What is the natural rate of unemployment? How much cyclical unemployment is necessary to reduce inflation by 3 percentage points? Using Okun's law, compute the sacrifice ratio. b. Inflation is running at 6 percent. The central bank wants to reduce it to 2 percent. Give two scenarios that will achieve that goal.
“The more people at work, the higher their bills” The Phillips Curve shows the correlation between unemployment and inflation.” In the light of this statement,(a) Draw the short-run trade-off between inflation and unemployment. How might the Central Bank move the economy from one point on this curve to another? (b) Draw the long-run trade-off between inflation and unemployment. Explain how the short-run and long-run trade-offs are related. (c) Illustrate the effects of the following developments on both the short-run and long-run Phillips curves. Give the economic reasoning underlying your answers.1. A rise in the natural rate of unemployment.2. A decline in the price of imported oil.
.) Suppose people's inflation expectations are subject to ran- dom shocks: at time t-1, expected inflation in time t is Et-1t = πt-1+t-1 where n-1 is a random shock with mean zero but deviates from zero when some event beyond past inflation causes expected inflation to change. Also, Ett+1 = πt + nt.
4. Views on the Long-run Phillips Curve Fleur is a macroeconomist who works as a policy maker for a European government. She believes that policy makers can choose from a menu of inflation and unemployment combinations and that the non-accelerating inflation rate of unemployment (NAIRU) varies over time. What school of thought best matches Fleur's viewpoint? Earlier monetarist New classical and OECD economist Persistence Keynesian Hysteresis Keynesian Old Keynesian