1. Draw a typical Phillips Curve. 2. Explain why some economists claimed that the Phillips Curve represented a menu of social choice. 3. Do economists still believe in the menu view of the Phillips Curve? What view has replaced the original view? 4. Given the new view of the Phillips Curve, why do economists believe that a "credible" inflation reducing policy will be less costly than an "incredible" inflation reducing policy. (Using a Phillips Curve diagram in your answer.)

1. Draw a typical Phillips Curve. 2. Explain why some economists claimed that the Phillips Curve represented a menu of social choice. 3. Do economists still believe in the menu view of the Phillips Curve? What view has replaced the original view? 4. Given the new view of the Phillips Curve, why do economists believe that a "credible" inflation reducing policy will be less costly than an "incredible" inflation reducing policy. (Using a Phillips Curve diagram in your answer.)

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter26: The Neoclassical Perspective

Section: Chapter Questions

Problem 14RQ: What is the shape of the neoclassical long-run Phillips curve? What assumptions do economists make...

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1 . Aggregate demand, aggregate supply, and the Phillips curve In the year 2023, aggregate demand and aggregate supply in the fictional country of Drooble are represented by the curves AD2023 AD 2023 and AS on the following graph. OPTIONS: Blank 1: Outcome A/Outcome B Blank 2: 2.94%, 0.98%, 5%, 3% Blank 3: movement along/shift Blank 4/5: a decrease/an increase
3. Explain how a rise in Government expending affects:3.1. The Phillips curve in the short run? How do you think are employers and employees going to react to this policy under adaptive expectations? 3.2. If the demand policy continues to apply how this is going to affect the Philips curve in the long run? 3.3. What about if the agents have rational expectations, is this policy effective?
How would a decrease in energy prices affect the Phillips curve?
II. True or False short explanations are needed if False) 1. Suppose a long-lasting bad business cycle shock hits the economy. Some workers' skills are destroyed and they are permanently out of the labor unions. If the historical u" is 5% and the current u is 8%, then cyclical unemployment rate equals to 3%. 2. A positive Phillips curve shock (supply shock) always increases inflation and decreasing output. 3. Lucas critique says that using macroeconomic model and estimated parameters to forecast the effect of policy changes may not valid. 4. According to the IS-LM model, increasing government purchase can shift the IS curve to the right because it increases the investment.
18)The top policy goal for Paul Volcker when he became chairman of the Federal Reserve's Board of Governors in 1979 was ___________ Select one: a. Fighting inflation which was at 25% b. Increasing employment. c. Increasing economic growth. d. Increasing regulation of commercial banks. e. Fighting inflation which was as high as 14%
10. Study Questions and Problems #10 An economics professor is considering improving class attendance and preparation by giving pop quizzes. Two approaches are being considered: pop quizzes on days when homework is due, or keeping the pop quizzes a secret and giving them on random days. Suppose that the students use rational expectations theory in the classroom True or False: Giving pop quizzes on random days will increase attendance more than pop quizzes on days when homework is due. O True False
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.
7)Which of the following is one of the federal Reserve's two policy mandates? 8)When unemployment is high, government policymakers might decide to do which of the following
5. Consider the Phillips curve πt = πt-1 – 0.5(ut – 0.01). a) What is the natural rate of unemployment? Graph the short-run and long-run relationships between inflation and unemployment? b) How much unemployment is necessary to reduce inflation by 3%? Compute the sacrifice ratio. Show your work. c) Do flexible exchange rates permit a country to pick its own unemployment-inflation trade-off target?
What is the shape of the neoclassical long-run Phillips curve? What assumptions do economists make that lead to this shape?
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%)
c) Suppose that the economy has the following Phillips curve T = T.1 – 0.5 (u-0.06) i. What is the natural rate of unemployment? ii. How much of cyclical unemployment is necessary to reduce inflation by 5 percent points? iii. Using Okun's law, compute the sacrifice ratio iv. Inflation is running at 10 percent. The central bank wants to reduce it to 5 percent. Give two scenarios that will achieve that goal