Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Question
Chapter 12, Problem 2NP
a
To determine
To plot: The graphical representation of
b)
To determine
To plot: The graphical representation of Philips curve and unemployment rate.
c)
To determine
To plot: The graphical representation of Philips curve and unemployment rate.
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Students have asked these similar questions
(Problem 3, Page 477) In a certain economy the expectations-augmented Phillips
curve is
π = π² − 2 (u – ū)
and ū= 0.06.
a. Graph the Phillips curve of this economy for an expected inflation rate of
0.10. If the Fed chooses to keep the actual inflation rate at 0.10, what will
be the unemployment rate?
b. An aggregate demand shock (resulting from increased military spending)
raises expected inflation to 0.12 (the natural unemployment rate is
unaffected). Graph the new Phillips curve and compare it to the curve you
drew in Part (a). What happens to the unemployment rate if the Fed holds
actual inflation at 0.10? What happens to the Phillips curve and the
unemployment rate if the Fed announces that it will hold inflation at 0.10
after the aggregate demand shock, and this announcement is fully believed
by the public?
c. Suppose that a supply shock (a drought) raises expected inflation to 0.12
and raises the natural unemployment rate to 0.08. Repeat Part (b).
According to the St. Louis Federal Reserve the natural unemployment rate is 4.42 percent (Q4
2023 ) and the U.S. Bureau of Labor Statistics (BLS) estimates the U.S. unemployment rate
(U3, October 2023 B) to be 3.9 percent. If you expect unemployment to continue to fall the
short-run Phillips curve would predict:
OA decrease in the inflation rate.
An increase in the inflation rate.
○ A decrease in the unemployment rate.
○ An increase in the unemployment rate.
You 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".
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Similar questions
- 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?arrow_forwardThe following graph plots the short-run and long-run Phillips curves (SRPC and LRPC, respectively) for an economy currently experiencing long-run macroeconomic equilibrium at point A, where the natural unemployment rate is 6% and the inflation rate is 8% per year. Suppose that the central bank for this economy has decided that inflation is too high and thus wants to decrease the inflation rate by 6 percentage points per year. A reduction in the rate of inflation is known as (deflation/disinflation) . To reduce inflation from 8% to 2% in the short run, the central bank would have to accept an unemployment rate of ____% True or False: If people have rational expectations, the economy may not have to endure an unemployment rate as high as predicted by the short-run Phillips curve. -True -Falsearrow_forwardAn economy's aggregate demand curve (the relationship between short-run equilibrium output and inflation) is described by the equation:Y = 15,000 - 12,000π, where π is the inflation rate. Initially, the inflation rate is 2 percent or π = 0.02. Potential output Yp equals 14,640.Note: Keep as much precision as possible during your calculations. Your final answer for inflation should be accurate to at least two decimal places and output should be accurate to the nearest whole number.a) Find inflation and output in short-run equilibrium. Inflation : 0%Output : $0 b) Find inflation and output in long-run equilibrium. Inflation : 0%Output : $0arrow_forward
- Suppose 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_forwardThe graph depicts a hypothetical economy's short-run Philips curve (SRPC). Please shift the SRPC to reflect what happens when expected inflation decreases by 2 percentage points. After the shift in SRPC, what is the unemployment rate if the public expects no inflation in the economy? % Inflation rate (%) -1 -2 0 7 6 SRPC 5 4 3 2 -3 0 1 2 3 4 5 6 7 8 0 10arrow_forwardTrue, False, or uncertain: If people assume that inflation will be the same as last year's inflation, the Phillips curve relation will be a relation between the change in the inflation rate and the unemployment rate.arrow_forward
- Analyze whether the following statements based on the 3 components in deriving the AS curve are true or false. Write TRUE is the statement is correct, and FALSE if it is incorrect. Provide an explanation why the statement is true/false. Statement 1. Wage rate increases when unemployment rate is below its natural rate. Statement 2. Based on the Phillips curve, a policy designed to increase the employment rate will also lead to a decline in inflation rate. Statement 3. Wage inflation is negatively associated with price inflation. Statement 4. When the economy managed to sustain 2 percentage points of growth in real GDP above the trend rate in a year, we can expect the unemployment rate to decline by 4 percentage points. Statement 5. Higher labor cost per output causes the price to rise.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_forwardAccording to the figure below, Inflation Rate (percent) 8 7 6 3 2 1 0 b. PC2? PC2 % 1 % 2 PC₁ 3 4 Rightward AS shifts cause leftward Phillips curve shifts. 5 6 What inflation rate would occur if the unemployment rate were 5 percent, with Instructions: Round your responses to the nearest 0.5 percent (e.g., 1.0, 1.5, 2.0). a. PC₁? Unemployment Rate (percent) 7 8arrow_forward
- In which of the following situations will demand pull inflation fall? a) Rising aggregate supply b) Reduced taxes c) Rising incomes d) Decreased imports e) Aggregate demand rising with aggregate supply lagsarrow_forwardThe effect of expectations on the Phillips curve is considered a Phelps’s primary contribution. We can use a modified version of the Phillips curve to illustrate the point that Phelps was trying to make. The key difference is that the position of this new kind of curve changes when the inflation rate that people expect changes. When actual inflation changes and expected inflation stays the same, you move along the curve. But when expected inflation changes, the entire curve shifts. Since expectations shift this curve, economists call it an expectations-augmented Phillips curve. The following graph shows a Phillips curve for a hypothetical economy where the natural rate of unemployment is 8%. Initially, the expected inflation rate equals the actual inflation rate of 4%. Use the Phillips curve on the graph to answer the questions that follow. Consider a scenario where the inflation rate unexpectedly rises from 4% to 5%. Wages rise to match the new level of inflation. Workers believe that…arrow_forwardAssume that expected inflation is based on the following: πet = θπt-1. If θ = 1, we know that A) a reduction in the unemployment rate will have no effect on inflation. B) low rates of unemployment will cause steadily increasing rates of inflation. C) the actual unemployment rate will not deviate from the natural rate of unemployment. D) the Phillips curve illustrates the relationship between the level of inflation rate and the level of the unemployment rate.arrow_forward
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