a)
The validity of the statement that the negative relationship between the concepts of
a)
Answer to Problem 1QAP
True
Explanation of Solution
The original Phillips curve is considered as a simple trade-off between inflation and unemployment, as Suggested by W.P.. This was stated at a time when the expectations on inflation was quite stable. Accordingly, when an economy goes through a growth period, the price levels would increase. Further, to cater to the output level required, more employment would be needed. Thus, the unemployment level would come down.
Introduction:The Phillips curve has been named so after W.P. who initially came up with the idea behind it. According to him inflation and unemployment are two concepts that have a solid, negative relationship. As per the theory, when
b)
The validity of the statement that the ideology behind the initial Phillips curve has been proven to be true in many countries over time.
b)
Answer to Problem 1QAP
False
Explanation of Solution
As per the original ideology behind the Phillips curve, there is a very firm, negative relationship between inflation and unemployment. However, in reality it has not been so in many countries. The curve has been related to the situation faced by the US economy during the 1970’s which is not the case of every economy. According to experts, the curve would shift over time due to expectations of inflation.
Introduction:The Phillips curve was introduced by W.P. According to him, the curve shows the firm, negative relationship between inflation and unemployment within an economy. Ideally, when an economy goes through a period of growth, the price levels would go up, creating inflation. Then there would be a necessity to produce more, which in turn creates jobs and reduces unemployment.
c)
The validity of the statement that inflation in some years are good predictors of the same in the future years to come and in some years they are not so.
c)
Answer to Problem 1QAP
True
Explanation of Solution
Inflation is the measurement of the increase in general price levels of an economy’s goods and services. It is one of the key economic indicators used for economic predictions. The general understanding is that the inflation rate of a particular year could be used as an indication of what it would be in the year to come. This has been done by many economies in the world. However, there are instances where such predictions have gone wrong. Predictions done based on such rates have actually become much different in some cases. For example, before the 1960’s the inflation rate in the US was very unpredictable. Nevertheless, it become much persistent during the 1970’s.
Introduction:Inflation is an indicator that is being much spoken of within the field of economics. It is the increase in general price levels within an economy. Inflation is an indicator that is being used for many economic predictions as well as the inflation rate itself in future periods. However, there had been instances where the inflation rates in consecutive period have taken figures that are much different from each other.
d)
The validity of the statement that the trade-off between inflation and unemployment could be exploited by policy makers only on a temporary basis.
d)
Answer to Problem 1QAP
True
Explanation of Solution
The inverse relationship between the concepts of inflation and unemployment is true only in the short run. This would be so only till the expected inflation rate is fixed. In an instance where the rising levels of expected inflation starts reducing real wages, more individuals would obtain employment and thus the unemployment rate would come down. In the medium term, the natural unemployment rate however is consistent against any level of stable inflation. Hence it cannot be reduced through inflation changes.
Introduction:Inflation and unemployment are two economic concepts that are much relevant in economic policy making. The trade-off between the two has been instrumental to a number of economic theories and concepts. It is said that this trade-off is being manipulated by policy makers in many instances.
e)
The validity of the statement that the rates of expected and actual inflation are always the same.
e)
Answer to Problem 1QAP
False
Explanation of Solution
As inflation and expected inflation both are important concepts in economic predictions and policy making, it is important to know the difference between the two. Inflation is the increase in the general prices of goods and services of an economy. Expected inflation is the inflation expected by that particular economy with regard to a particular time period. These two concepts are not the same. These would become the same only when the level of unemployment is set at its natural rate.
Introduction:Inflation and expected inflation are two concepts that are very similar in nature. However, they are not the same. Inflation refers to the increase in the general price levels of an economy. Expected inflation is the inflation rate applicable for a period to come as expected by the economy’s participants.
f)
The validity of the statement that policy makers have the ability to obtain an unemployment rate as low as they want as suggested by renowned economists in the 1960’s.
f)
Answer to Problem 1QAP
False
Explanation of Solution
Even though policy makers thought that they could reduce the rate of unemployment as much as they want, as suggested by scholars, it is not the reality. The rising expected inflation rate was the reason behind this. Furthermore it must not be forgotten that there is always a rate of natural unemployment within an economy. The only means economists could use to do so is to trick the participants of the economy by increasing the prices over the rate of expected prices.
Introduction:Unemployment is an important indication used in economic analysis, poly making and predictions. It suggests the number of individuals who are over a specific age level that do not engage in any form of paid employment and are available for work.
g)
The validity of the statement that provided that an assumption of the inflation rate being the same as the previous year will make the relation of the Phillips curve a relation among the unemployment rate and the change in the rate of inflation.
g)
Answer to Problem 1QAP
True
Explanation of Solution
As mentioned in the question, if individuals of an economy assumes that the inflation rate of a particular year would be same as the previous year, the relation of the Phillips curve would be a relation among the change in the rate of unemployment and a change in the rate of inflation. This would be called as the augmented Phillips curve.
Introduction:Phillips curve is an economic concept that is being used widely. It states the relationship between the inflation rate and the unemployment rate of an economy. The said relationship is stated as a solid, inverse relationship according to scholars.
h)
The validity of the statement that the rate of natural unemployment of a given economy would be constant over time.
h)
Answer to Problem 1QAP
False
Explanation of Solution
The natural rate of unemployment cannot be constant over time as it is an indication of many characteristics of the labor market. Such characteristics are subject to change over time. Thus, the rate of natural unemployment too changes accordingly.
Introduction:Natural rate of unemployment is as important as unemployment in economic analysis. It states of the minimum level of unemployment in an economy that prevails due to real economic forces.
i)
The validity of the statement that the rate of natural unemployment is same across small economies.
i)
Answer to Problem 1QAP
False
Explanation of Solution
The natural rate of unemployment is the minimum level of unemployment within a given economy. Natural unemployment in an economy shows the number of unemployed individuals due to the structure of that economy’s labor force. For example, there may be individuals who lack skills necessary to do a job. Further, due to technological enhancements, some may have lost their jobs. Such factors of the labor force is different from country to country. Hence, the natural rate of unemployment would not be the same across countries.
Introduction:Natural rate of unemployment is something that could be seen in any economy around the world. It is the minimum level of unemployment that prevails in any economy and are resulted from real factors impacting upon the economy.
j)
The validity of the statement that deflation is the inflation rate being negative.
j)
Answer to Problem 1QAP
True
Explanation of Solution
Inflation refers to the general price levels of the goods and services getting increased within a given period of time. Deflation could be considered as the opposite of inflation. It is the situation where inflation decreases over time. In other words, if the inflation rate goes further below zero, it could be considered as inflation. It could also be called as negative inflation.
Introduction:Inflation is an economic variable that is widely being used in economic analysis and policy making. It suggests the increase in general price level of the goods and services in an economy. Deflation is also an important concept that goes hand in hand with inflation. It is important to know the connection between the two concepts with emphasis on economic analysis.
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Chapter 8 Solutions
Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
- You observe the following short-run Phillips curve for the economy: T = 9.2 -0.26(u - 6.5%) + v. There are no supply shocks to the economy, and the actual unemployment rate is 6.5% (and will stay that way for the foreseeable future). What will expected inflation be next year? Write your answer as a percentage, and round at one (1) decimal. Do not write the percentage sign. If you need more information to answer the question, write "O".arrow_forwardThe Phillips curve in Lowland takes the form of π = 0.04 − 0.6(u − 0.05), where π is the actualinflation rate and u is the unemployment rate. The Phillips curve in Highland takes the form ofπ = 0.08 − 0.4(u − 0.05). The current unemployment rate in both countries is 9 percent (0.09). For both countries, analyze the impact on inflation of a 2% decrease in unemployment? In which country will policymakers face a bigger trade-off if they try to reduce unemployment in the shortrun? Whyarrow_forwardThe Phillips curve in Lowland takes the form of π = 0.04 – 0.5 (u – 0.05), where π is the actual inflation rate and u is the unemployment rate. The Phillips curve in Highland takes the form of π = 0.08 – 0.5 (u – 0.05). The current unemployment rate in both countries is 9 percent (0.09). Explain the difference in the Phillips curves in Highland and in Lowland.arrow_forward
- Consider the US Phillips Curve for the US economy: 1 = n° – a(u – ua), where a = 0.3. a) If the Fed commits to having zero inflation and the public believes it, how much inflation will result from decreasing the unemployment rate by 1 percentage point below the natural rate of unemployment. b) The public stops believing the Fed and now assume expected inflation to be that of question a). How much inflation will result if the Fed tries to again to decrease the unemployment rate by 1 percentage point below the natural rate of unemployment. c) Now assume that the Fed is not going to try to intervene in the unemployment rate anymore, allowing it back to its natural rate. What would the inflation rate be if the public expect the inflation from b)? What would the inflation be in the next periods? Explain d) Explain the problem that the FED faces when the public stops believing that the target inflation will be met.arrow_forwardWhich of the following is true about the Phillips curve? Group of answer choices The empirical relationship between unemployment and inflation in the US disappeared after the 1970s. This means that the theoretical Phillips curve does not represent the world well. For a researcher to identify the theoretical Phillips curve from empirical data, the economy must be subject to supply shocks. The empirical Phillips curve implies that a government must choose between either low unemployment and high inflation or high unemployment and low inflation. When inflation expectations adjust, the negative empirical correlation between inflation and unemployment might disappear.arrow_forwardDerive the original Phillips curve and answer the following questions:a) What effect does an increase in the expected price level have on the price level?b) What effect does an increase in the unemployment rate have on the price level?c) What effect does a decrease in business competition have on inflation?d) What is the effect of liberalizing foreign trade?e) What effect does the formation of trade unions have?arrow_forward
- An 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 following graph plots the long-run Phillips curve (LRPC) and short-run Phillips curve (SRPC1SRPC1) for an economy currently experiencing long-run equilibrium at point A (grey star symbol). Which of the following is true along SRPC1SRPC1? -The actual unemployment rate is 6%. -The expected inflation rate is 5%. -The actual inflation rate is 5%. -The natural rate of unemployment is 3%. Suppose that the central bank for this economy suddenly and unexpectedly decreases the money supply in an effort to reduce inflation. As a result of this unanticipated policy action, actual inflation falls to 3%. On the previous graph, use the black point (plus symbol labeled "B") to illustrate the short-run effects of this policy. Suppose that now, after a period of 3% inflation, households and firms begin to expect that the inflation rate will persist at the level of 3%. On the previous graph, use the purple line (diamond symbol) to draw SRPC2SRPC2, the short-run Phillips curve that is…arrow_forwardThe following graph plots the long-run Phillips curve (LRPC) and short-run Phillips curve (SRPC1SRPC1) for an economy currently experiencing long-run equilibrium at point A (grey star symbol). Which of the following is true along SRPC1SRPC1? -The actual unemployment rate is 6%. -The expected inflation rate is 5%. -The actual inflation rate is 5%. -The natural rate of unemployment is 3%. Suppose that the central bank for this economy suddenly and unexpectedly decreases the money supply in an effort to reduce inflation. As a result of this unanticipated policy action, actual inflation falls to 3%. On the previous graph, use the black point (plus symbol labeled "B") to illustrate the short-run effects of this policy. Suppose that now, after a period of 3% inflation, households and firms begin to expect that the inflation rate will persist at the level of 3%. On the previous graph, use the purple line (diamond symbol) to draw SRPC2SRPC2, the short-run…arrow_forward
- The corresponding table includes a breakdown including Inflation Rate, Unemployment Rate, Price Level, and Real GDP. Using the data below, plot the graphs: Plot the short-run Phillips curve and the aggregate supply curve on separate graphs. Plot the long-run Phillips curve on a separate graph, when the natural unemployment rate is 6%. Inflation Rate Unemployment Rate Price Level Real GDP 2% 7% 104 9.8 3% 6% 103 10.0 4% 5% 102 10.2arrow_forwardIf the Phillips curve in an economy is given by π = π-1-0.5(u-0.02), then it takes 6 percentage points of cyclical unemployment to reduce inflation by 3 percentage points requires 3 percentage points of cyclical unemployment to reduce the rate of inflation by 6 percentage points the natural rate of unemployment is 3% the natural rate of unemployment is 5% the natural rate of unemployment is 6%arrow_forwardAssume that an economy is governed by the Phillips curve π= πe – 0.5(u – 0.06), where π= (P – P–1)/P–1, π e = (P e – P–1)/P–1, and 0.06 is the natural rate of unemployment. Further assume π e = π–1. Suppose that, in period zero, π= 0.03 and πe = 0.03—that is, that the economy is experiencing steady inflation at a 3-percent rate. a. Now assume that the government decides to impose whatever demand is necessary to cut unemployment to 0.04. Suppose the government follows this policy for periods 1 through 5. Create a table of π and πe for these five periods. b. Assume that, for periods 6 through 10, the government decides to hold unemployment at 0.06. Create another table of π and πe for these five periods. Is there any reason to expect the inflation rate to go back to 0.03? c. If the government persisted in its behavior under part a, do you think the public would continue for long forming expectations according to πe = π–1? Why?arrow_forward