Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Question
Chapter 12, Problem 12E
(a)
To determine
Negative shock and the slowdown in the
(b)
To determine
Negative shock and the policy to counteract the shock.
(c)
To determine
False negative shock and the policy to counteract the shock.
(d)
To determine
Impact of the policy to counter false negative shock.
(e)
To determine
The methods to identify the mistake in the policy.
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The 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.
Suppose the Phillips curve is
and the Aggregate Demand curve is
Tt = Tt1+3ytot
Yt = at 5(πt - 0.02)
where at = Ot = 0 in the steady state.
(a) Calculate the steady state values of output and inflation in this economy.
(b) Calculate the short- and long-run responses of the economy to the following shocks (use a
table to report your answers, as well as show them graphically on the AD-AS graph, as well
as plot inflation and output against time):
(1) A one-time decrease in ot to -0.05.
(2) A one-time increase in at to 0.05 (at returns to 0 thereafter).
(3) A permanent decrease in the Fed's inflation target from 0.02 to 0.
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.
Chapter 12 Solutions
Macroeconomics (Fourth Edition)
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- 3) Suppose that a fall in consumer spending causes a recession a)Illustrate the immediate changes in the economy using both an aggregate-supply/aggregate-demand diagram and a Phillips-curve diagram.On both graphs, label the initial long-run equilibrium as point A and the resulting short-run equilibrium as point B.What happens to inflation and unemployment in the short-run 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? Explain.arrow_forwardUse aggregate demand (AD) and supply (AS) analysis to predict the effects of COVID-19 pandemic on inflation and output. Show and describe the effects in both the short run and the long run. (Demonstrate these effects on a graph) (Hint: First, classify the COVID-19 pandemic as a supply shock or a demand shock or both)arrow_forwardFor each of the following scenarios, illustrate the effects of the development on both the short-run and long-run Phillips curves (SRPC and LRPC, respectively). (Please use the image attached) 1. There is a rise in the price of imported oil. 2. There is a fall in government spending.arrow_forward
- 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?arrow_forwardYou observe the following short-run Phillips curve for the economy: T = 9.2 -0.26(u - 6.5%) + v. There are no supply shocks to the economy, and the actual unemployment rate is 6.5% (and will stay that way for the foreseeable future). What will expected inflation be next year? Write your answer as a percentage, and round at one (1) decimal. Do not write the percentage sign. If you need more information to answer the question, write "O".arrow_forwardSuppose that the government is considering enacting an expansionary policy in 2023 that would shift aggregate demand in 2024 from ADAADA to ADBADB. This would cause a (move along , shift of) the short-run Phillips curve, resulting in (increase, decrease) in the inflation rate and (increase, decrease) in the unemployment rate.arrow_forward
- Refer to the diagram. The initial aggregate demand curve is AD1 and the initial aggregate supply curve is AS1. In the long run, demand-pull inflation is best shown as: A) a move from a to d. B) a shift of aggregate demand from AD1 to AD2 followed by a shift of aggregate supply from AS1 to AS2. C) a shift of aggregate supply from AS1 to AS2 followed by a shift of aggregate demand from AD1 to AD2. D) a move from d to b to a.arrow_forwardMA4. 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…arrow_forwardAs described in the chapter, the Federal Reserve in 2008 faced a decrease in aggregate demand caused by the housing and financial crises and a decrease in short-run aggregate supply caused by rising commodity prices. 1. Starting from a long-run equilibrium, illustrate the effects of these two changes on aggregate supply and aggregate demand on the following graph. Then, on the subsequent graph, indicate what happens on a Phillips-curve diagram. (Please use the images attached.) 2. Which of the following is true as a result of the two changes in aggregate demand and aggregate supply? (Note: Do not consider the magnitudes of the shifts given on the preceding graphs. Think only about the directions of the shifts.) Check all that apply. -Equilibrium output will rise. -The price level will fall. -Unemployment will rise. -The effect on the inflation rate will be ambiguous.arrow_forward
- For each of the following scenarios, illustrate the effects of the development on both the short-run and long-run Phillips curves (SRPC and LRPC, respectively). 1. There is a rise in the price of imported oil. 2. There is a fall in government spending.arrow_forwardAssume the economy of Country X is operating above its full-employment output level. Using a correctly labeled graph of aggregate demand, short-run aggregate supply, and long-run aggregate supply, show the short-run equilibrium, labeling the equilibrium price level as PLe and the equilibrium output as Ye. Draw a single correctly labeled graph and show both a short-run and a long-run Phillips curve. Identify a point that could represent the short-run equilibrium in part (a) and label it as Z. Assume that the central bank of Country X wants the economy to be in full-employment equilibrium. What open-market operation should the central bank initiate? Given your answer in part (c), what will be the effect of the central bank’s open-market operation on each of the following in the short run? The nominal interest rate Employment. Explain. Assume that the real interest rate increases in Country X. Will the international value of Country X’s currency increase, decrease, or…arrow_forwardQuestion THREE a) Distinguish between the classical and the Keynesian aggregate supply curve b) Discuss the sticky wage model of aggregate supply curve 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 goalarrow_forward
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