Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Chapter 12, Problem 11E
To determine
Impact of increase in the slope of the
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Changing the slope of the Phillips curve: Suppose the slope of the Phillips
curve the parameter -increases. How would the results differ from the
Volcker disinflation example considered in the chapter? What kind of changes
in the economy might influence the slope of the Phillips curve?
Prior to the mid-1970s, many economists thought a higher rate of unemployment would reduce the inflation rate. Why? How does the modern view of the Phillips curve differ from the earlier view?
Overstimulating the economy: Suppose the economy today is producing output at its potential level and the inflation rate is equal to its long-run level, with π = 2%. What happens if policymakers try to stimulate the economy to keep output above potential by 3% every year? How does your answer depend on the slope of the Phillips curve?
Chapter 12 Solutions
Macroeconomics (Fourth Edition)
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- Does the short-run Phillips curve have a positive or negative slope? Explain how this slope is derived.arrow_forwardSuppose the Federal Reserve sets the real interest rate to 1.5%. Moreover, assume that there are no demand shocks, that b = 2.5, and that F = 0.02. If the resulting change in the inflation rate is +0.375 percentage points, what is the value of the parameter D? (Round to the nearest hundredth.) Hint: Use the IS and Phillips Curves to calculate your answer.arrow_forwardTrue or false? Phillips curve represents a structural relationship between unemployment and inflation that never changes.arrow_forward
- Watch the 2012 OpenLearn from The Open University video The Phillips Curve - 60 second adventures in economics and answer the following questions based on the video and your reading of the textbook: What is the Phillips Curve? Explain. Suppose the unemployment rate in Canada is very high. If the relationship depicted by the Phillips Curve is true, what could the hands-on approach to economic policy do to reduce unemployment? How would such a policy affect inflation? Explain why both unemployment and inflation rose in the 1970s. 2. Consider the following scenarios and briefly explain how each scenario would affect short-run aggregate supply (SAS), long-run aggregate supply (LAS) or aggregate demand (AD) in Canada. In some situations, more than one may be affected. Canada produces larger number of university graduates who possess higher levels of education and skill. Depletion of resources cause increase in the prices of key inputs in production. Canada’s trading…arrow_forwardGraphically derive short run Phillips curve with the help of aggregate demand and supply and demand.arrow_forwardHow can you show an output gap on the vertical phillips curve model?(can use the full inflation targeting model if that helps)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 Phillips curve represents the relationship between unemployment and inflation. You are required to think about the impact on the economy of movements along the curve. If the unemployment rate in the economy is steady at 4 percent per year, how does the short-run Phillips curve predict that the inflation rate will be changing, if at all? What will happen if the unemployment rate now rises to 7 percent per year? Assume there are no changes to inflation expectations. Provide an appropriate graph to support your discussion.arrow_forwardWhat is the "Phillips Curve"? Why do inflation and unemployment tend to be inversely related?arrow_forward
- Would you expect to see long-run data trace out a stable downward-sloping Phillips curve?arrow_forwardDraw a Phillips curve graph here that shows a natural rate of unemployment of 4% and a current inflation rate of 2%. Make sure your lines and axes are labeled and your graph is complete! Use your knowledge of The Phillips Curve to answer the following questions. The threat of future inflation: makes people reluctant to loan money for long periods. makes people eager to loan money for long periods. has no effect on loaning money. increases the value of money paid back in the future. makes people reluctant to borrow money for long periods. According to the short-run Phillips Curve, there is a trade-off between: interest rates and inflation. the growth of the money supply and interest rates. unemployment and economic growth. inflation and unemployment. economic growth and interest rates. Which of the following is true of the long-run Phillips curve? it shows there is a trade-off between unemployment and inflation. it is positively sloped when the inflation rate exceeds…arrow_forwardTrue or false? An increase in inflation expectations shifts the short-run Phillips curve right and has no effect on the long-run Phillips curve.arrow_forward
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