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.

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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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(a) What events of the 1970s and 1980s made economists believe that the shortrun relationship between inflation and unemployment was unstable (not fixed and permanent)? (b) Explain, using a diagram(s) and the concept of stagflation, the relationship between shifts in the SRAS curve and the position of the short-run Phillips curve.
2. What is the eqution and shape of the modem aggregate supply curve according to imperfect infomation model? Using the equation of Aggregate Supply (AS) derive the equation of Expectation augmented Phillips curve and explain causes of inflation in tems of it. How does expectation augmented Phillips curve explain Stagflation?
Suppose πt = πt−1 −2(ut −0.04) is the Phillips Curve equation in the economy. Answer thefollowing questions.a. What is the natural rate of unemployment?b. Graph the short run and the long run relationship between inflation and unemployment.c. How much cyclical unemployment is necessary to reduce inflation by 10 percentagepoint?d. The inflation is running at 12 percent. The Central Bank wants to reduce it to 9 percent.Give two scenarios that will achieve the goal.
3. a) Using AD-AS model, explain how a negative demand shock due to COVID 19 will affect the economy in the short run and long run (Show short run and long run adjustment in a single diagram). b) Derive the equation of Expectation Augmented Phillips curve using standard equation of Aggregate Supply (AS) and explain causes of inflation in terms of it. How does expectation augmented Phillips curve explain Stagflation?
A. What assumptions did Thomas Sargent make when he claimed that inflation is always and everywhere a fiscal phenomenon?" B. Why is it appropriate in the book's short-term model for the author to use the Phillips Curve as an Aggregate Supply curve? Does it capture the working of the labor market as well as an AS curve based, say, on sticky wages? C. Provide an example of the book's short-run model being based on "microfoundations."
2. Suppose that an economy has the Phillips curve T = T-1 - 0,5(u – 5). a. What is the natural rate of unemployment? b. Graph the short-run and long-run relation- ships between inflation and unemployment. c. How much cyclical unemployment is necessary to reduce inflation by 4 percentage points? Using Okun's law, compute the sacrifice ratio. d. Inflation is running at 6 percent. The central bank wants to reduce it to 2 percent. Give two scenarios that will achieve that goal.
15. Suppose that the relationship between inflation rate (x) and unemployment rate (u) is described by the following equation: H, - n = (m + z) – au, where m = 0.05, z = 0.04, and a = 2. In this economy, the authorities keep unemployment rate at 4% forever. a. If the modified Phillips curve describes the relationship between a and u correctly, how should "x,*" be specified? Rewrite the equation using this specification. And assuming that 7-1= 1%, compute Af, T4+1, and x4+2. b. Derive the natural rate of unemployment.
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.
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%)
1.Suppose the Phillips curve is represented by the following equation: Ttt-Tt-1 = 12-ut. The natural rate of unemployment in this economy is? (show your working) 2.A $100 (real) billion increase in government spending, G will have which of the following effects in the medium run? 3.A reduction in unemployment insurance will cause the wS relation to shift down, explain why?
. Explain how the original Phillips curve was transformed into the expectations augmented Phillips curve. Using the latter, describe why any expansionary policy would not be effective in the long run and move the macro-economy back to the Natural Rate of Unemployment (NRU).
) a. Draw a short run Phillips curve and show the slope of the curve and then explain what it implies for the policy makers?