A policy-maker minimises a loss function of the form: V = [u (unk)]² + a(л-π)² subject to current given conditions for the economy stated as u = Un¯ b(л-πе) +ε. Price and wage setters are endowed with rational expectations. Derive the time consistent rate of inflation.
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- An economy's aggregate demand curve (the relationship between short-run equilibrium output and inflation) is described by the equation:Y = 15,000 - 12,000π, where π is the inflation rate. Initially, the inflation rate is 2 percent or π = 0.02. Potential output Yp equals 14,640.Note: Keep as much precision as possible during your calculations. Your final answer for inflation should be accurate to at least two decimal places and output should be accurate to the nearest whole number.a) Find inflation and output in short-run equilibrium. Inflation : 0%Output : $0 b) Find inflation and output in long-run equilibrium. Inflation : 0%Output : $0A way for policymakers to avoid the problems that deflation can present and still meet their objective of price stability is to Multiple Choice set a higher inflation target. target a nominal interest rate of zero. keep the monetary base fixed. set a target of zero inflation.If inflation rises unexpectedly by 5% which of the following economic actors are helped by the higher than expected inflation? a) People and government with long-term debt at fixed interest rates b) Someone with a large stash of cash in a safe deposit box c) None of the choices is correct d) A person who is not due to receive a pay raise for another 11 months e) A bank lending money at a fixed rate of interest
- The table below reports the actual inflation rate from 2016 to 2020. Complete the table, assuming people form expectations adaptively. Give all answers to two decimals. Year 2016 2017 2018 2019 2020 Actual inflation rate 3% 4.50% 7.00% 6.00% 4.00% Expected inflation rate a) d) e) 3% 4.50% % % % b) c) f) Error 0% 1.00% % % %There are two countries in the world, A and B. Suppose the central bank in country A has an annual inflation target pai = 0.02 while the central bank in country B has anannual inflation target pai = 0.03. In the long run, we would expect the nominalexchange rate of country A to appreciate against country B at a rate of about 1% per year.True or False? Explain.Suppose that the level of unemployment in the economy is determined by the follow equation: U = 7.55 1.88*(i - ie) Where U is the unemployment rate, i is the actual inflation rate, and it is the expected inflation rate. All variables are entered in percentage form (e.g. if inflation is 30.57%, you plug in 30.57 for i, not 0.3057). Last year, the inflation rate was 7.87%, and people have adaptive expectations. What does the inflation rate need to be this year in order for the unemployment rate to be 2.81%? Note: Everything is already in percentage form. You do not need to multiply or divide by 100 at any point. Enter in your answer as it is calculated in the equation. Round your final answer to two decimal places.
- Inflation does not affect all prices equally. This ragged inflation causes relative-price variability, and consumer decisions Question 33 options: are distorted and the ability of markets to efficiently allocate factors of production is impaired. are distorted, but markets are still able to efficiently allocate factors of production. are not distorted, but the ability of markets to efficiently allocate factors of production is impaired. are not distorted and markets are still able to efficiently allocate factors of production.Edison receives a portion of his income from his holdings of interest-bearing government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a low-inflation scenario and a high-inflation scenario. NOTE: options for drop down questions are as follows Compared with lower inflation rates, a higher inflation rate will ______ (increase OR decrease) the after-tax real interest rate when the government taxes nominal interest income. This tends to _______ (encourage OR discourage) saving, thereby _______ (increasing OR decreasing) the quantity of investment in the economy and _______ (increasing OR decreasing) the economy's long-run growth rate.In which of the following situations will demand pull inflation fall? a) Rising aggregate supply b) Reduced taxes c) Rising incomes d) Decreased imports e) Aggregate demand rising with aggregate supply lags
- Expectations of inflation are ____________ effective than/as actual inflation in ____________ production costs. a) less; increasing b) less; decreasing c) as; increasing d) as; decreasing e) more; increasingThis kind of inflation is called (cost-push, demand-pull) inflation. Inflation of this type is accompanied by (a decrease, an increase) in aggregate output.