8. Monetary policy and the Phillips curveThe following graph plots the short-run Phillips curve for a hypothetical economy. The given point on the graph indicates the initial rates ofunemployment and inflation. Assume that the economy is currently in long-run equilibrium.Suppose the central bank of the hypothetical economy decides to decrease the money supply.On the following graph, shift the curve or drag the blue point along the curve, or do both, to show the short-run effects of this policy.Hint: You may assume that the central bank's move was unanticipated.INFLATION RATE (Percent)52INFLATION RATE (Percent)10650103In the short run, an unexpected decrease in the money supply results inunemployment rate.09612UNEMPLOYMENT RATE (Percent)3SR Phillips CurveOn the following graph, shift the curve or drag the blue point along the curve, or do both, to show the long-run effects of the decrease in the moneysupply.O6UNEMPLOYMENT RATE (Percent)915121815In the long run, the decrease in the money supply results in(relative to the economy's initial equilibrium).SR Phillips Curve18-O(?)(?)in the inflation rate andin thein the inflation rate andin the unemployment rate

The Philips curve shows an inverse relationship between inflation and unemployment.When unemployment…

The following graph plots the short-run Phillips curve for a hypothetical economy. The given point on the graph indicates the initial rates of unemployment and inflation. Assume that the economy is currently in long-run equilibrium. Suppose the central bank of the hypothetical economy decides to decrease the money supply. On the following graph, shift the curve or drag the blue point along the curve, or do both, to show the short-run effects of this policy. Hint: You may assume that the central bank's move was unanticipated. INFLATION RATE (Percent) 5 1 INFLATION RATE (Percent) 0 6 5 0 1 0 3 In the short run, an unexpected decrease in the money supply results in unemployment rate. 0 6 12 UNEMPLOYMENT RATE (Percent) 9 3 SR Phillips Curve On the following graph, shift the curve or drag the blue point along the curve, or do both, to show the long-run effects of the decrease in the money supply. 9 15 6 12 UNEMPLOYMENT RATE (Percent) 18 15 In the long run, the decrease in the money supply results in (relative to the economy's initial equilibrium). SR Phillips Curve 18 (?) (?) in the inflation rate and in the in the inflation rate and in the unemployment rate

The following graph plots the short-run Phillips curve for a hypothetical economy. The given point on the graph indicates the initial rates of unemployment and inflation. Assume that the economy is currently in long-run equilibrium. Suppose the central bank of the hypothetical economy decides to decrease the money supply. On the following graph, shift the curve or drag the blue point along the curve, or do both, to show the short-run effects of this policy. Hint: You may assume that the central bank's move was unanticipated. INFLATION RATE (Percent) 5 1 INFLATION RATE (Percent) 0 6 5 0 1 0 3 In the short run, an unexpected decrease in the money supply results in unemployment rate. 0 6 12 UNEMPLOYMENT RATE (Percent) 9 3 SR Phillips Curve On the following graph, shift the curve or drag the blue point along the curve, or do both, to show the long-run effects of the decrease in the money supply. 9 15 6 12 UNEMPLOYMENT RATE (Percent) 18 15 In the long run, the decrease in the money supply results in (relative to the economy's initial equilibrium). SR Phillips Curve 18 (?) (?) in the inflation rate and in the in the inflation rate and in the unemployment rate

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The graph shows Iran's short-run Phillips curve and long-run Phillips curve when the natural unemployment rate is 10 percent and the expected inflation rate is 12 percent a year. Draw a point to show the current unemployment rate and inflation rate according to the news clip. Suppose Iran removes the subsidies and consumers don't know what the higher prices will be. Illustrate the most likely path of unemployment and inflation. Draw either an arrow along the SRPC showing the direction of change, or a new SRPC. Label it 1. Suppose instead that Iran removes the subsidies and announces the new prices so that consumers know what they are. Illustrate the most likely path of inflation and unemployment. Draw either an arrow along the SRPC showing the direction of change, or a new SRPC Label it 2. ILS
The following graph depicts the short-run and long-run Phillips curves (SRPC and LRPC) for a hypothetical economy in long-run macroeconomic equilibrium at point A, where the natural unemployment rate is 6% and the current inflation rate is 8% per year.
Assume the economy is described by the following equations: Phillips Curve: Okun's Law: T = Tt-1 – 1.5% – (ut – 0.05) AY/Y = 3% - 3(ut– 0.05) a) How could we know that expectations are not rational in this setup? b) Imagine that last year's inflation is equal to 11%. Imagine the Federal Reserve raises unemployment to 8% and keeps it there until inflation reduces to 2%. How many years of 8% unemployment would it take for inflation to reach 2%? c) What values of inflation would we observe over time as inflation reached 2%? d) How much output is lost to bring down inflation to 2%?
Answer the given question with a proper explanation and step-by-step solution.
How does the modern view of the Phillips curve differ from the earlier view? ___The early view of the Phillips curve suggested that the Phillips curve shifts with changes in inflation expectations. Such a view failed to recognize that the Phillips curve is a fixed inverse relationship between inflation and unemployment. ___The early view of the Phillips curve suggested that the Phillips curve is fixed, with higher rates of inflation associated with lower rates of unemployment, and vice versa. Such a view failed to recognize the importance of inflation expectations in determining the position of the short-run Phillips curve. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
The long-run effects of monetary policy The following graphs plot the long-run equilibrium situation for an economy. The first graph plots the aggregate demand (AD) and long-run aggregate supply (LRAS) curves. The second graph plots the long-run and short-run Phillips curves (LRPC and SRPC, respectively). LRAS H AD 3 6 9 12 OUTPUT (Trillions of dollars) PRICE LEVEL 0 15 18 AD 441 LRAS
Use the data in the following table to calculate the refinancing rate (i) using the Taylor rule, and fill in the last cell in table. Variable Value Equilibrium real refinancing rate (r*) 2% Four-quarter average inflation (1) Inflation target („T) 2% 1% Output (Y) 11.5 Potential output (Y*) 12 Weight on the output gap (w1) 0.5 Weight on the inflation gap (w2) 0.5 Refinancing rate (i) Suppose that the equilibrium real refinancing rate (r*) is 1% instead of 2%. Based on the Taylor rule and assuming everything else remains the same, how would this change the refinancing rate (i) you calculated in the previous question? The central bank should set the refinancing rate at 1.42%. The central bank should set the refinancing rate at -0.58%. For every percentage point lower the equilibrium real refinancing rate goes, the nominal refinancing rate should be 1 percentage point higher. Suppose the inflation rate over the last four quarters has been 3% instead of 2%. Assuming everything else is the…
Which of the following is true about the Phillips curve? 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.
In a certain economy, the expectations-augmented Phillips curve is π = T²2(u - u) and u=0.06. a. Graph the Phillips curve of this economy for an expected inflation rate of 0.10. If the central bank chooses to keep the actual inflation rate at 0.10, what will be the unemployment rate?
If the current inflation rate is 10% and you are asked to predict the cost of decreasing it to 3% next year. 1)Will it result deflation policy or a disinflation policy? Why? 2) Give an estimate of the cost in terms of output assuming the sacrifice ratio is 4 and explain the economic cost of reducing inflation by drawing the Phillips curve. 3) If an economist says computing the cost of this policy using the sacrifice ratio is not totally correct because people are rational and they will take the new policy into account when forming expectations about the future. Explain this statement and the reason behind it by showing what happens the Phillips curve 4)if people update their expectations about the future instantaneously. How costly would it be to reduce inflation if the adjustment in expectations occurs instantaneously?
Assume an imaginary country called Narnia. Firms in this country heavily rely on natural gas as a raw material to produce the final output. Assume a sudden fall in the price of natural gas. This shock is an event that directly affects firms' costs of production and thus the price that they charge. Describe the effects of this shock on the aggregate supply curve and on the Phillips curve of the economy of Narnia. Use a diagrammatic analysis to provide your answer.
MA4. 13. If the equation for a country's Phillips curve is π = 0.05 – 0.8(u – 0.05), where π is the rate of inflation and u is the unemployment rate, what is the short-run inflation rate when unemployment is 3 percent (0.03)? A) .066 B) -.056 C) -.066 D) .056 11. The aggregate supply equation is Y = Y + α(P – EP). Assume that Y is 2,000, α = 200, P = 1.12 and EP = 1.00. What is the value of Y? A) 2,232 B) 2,024 C) 2,400 D) 2,012 9. If policymakers announce in advance how policy will respond to various situations but then renege on their announcements, this a problem of: A) policy by rule. B) policy by discretion. C) time inconsistency of policy. D) monetary policy. 10. According to the sticky-price model, output will be above the natural level if: A) firms expect a high price level and the demand for goods is high. B) the proportion of firms with flexible prices equals the proportion of firms with sticky prices. C) the price level is above the…