Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Chapter 12, Problem 1AP
To determine
Effect of government policies on trend of
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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?
What is the "Phillips Curve"? Why do inflation and unemployment tend to be inversely related?
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?
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Similar questions
- 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.arrow_forwardWhat is stagflation? How may it affect the Phillips Curve? What policy measures may be taken to reduce stagflation?arrow_forwardIf expected inflation decreases, does the short-run Phillips curve shift? If so, what direction does it shift? Does the long-run Phillips curve shift? If so, what direction does it shift?arrow_forward
- 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."arrow_forwardWhat are some factors that might infuence the slope of the Phillips curve?arrow_forwardConsider a situation where the government implemented a successful program to train unemployed workers with new skills, find jobs suited to those new skills and help them relocate to the new jobs. a. What would be the impact of such a government expenditure (expansionary fiscal policy) on the short and long-run Phillips curve? b. Could an expansionary monetary policy achieve the same result?arrow_forward
- Hi, could you help me solve this problem? Consider an increase in global oil and gas prices from the point of the euro area (that does not produce much oil or gas itself). Think of this shock as a supply shock and use the AD-AS -model to explain how it is likely to affect output (or unemployment) and inflation. How does your result relate to the original Phillips curve? Your answer should include a graph and a short explanation in words.arrow_forwardHow did the Phillips Curve look differently between pre-pandemic period vs. after-pandemic (recovery) period? What were the possible explanations?arrow_forwardDoes the Phillips curve have a positive or negative slope? Explain how this slope is derived. When will an increase in aggregate demand not result in lower unemployment rates in the short run?arrow_forward
- 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?arrow_forwardDo you think the Phillips curve is a useful tool for analyzing the economy today? Why or why not? Please cite references to support your point of view.arrow_forwardDo you think the Phillips curve is a useful tool for analyzing the economy today? Why or why not?arrow_forward
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