Econ Macro (book Only)
6th Edition
ISBN: 9781337408745
Author: William A. McEachern
Publisher: Cengage Learning
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Question
Chapter 16, Problem 5P
To determine
The methodology by which the policymakers can get the inflation rates lower if it is unexceptionally high and whether the rational expectations provides benefits or not.
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Question 18
Suppose the economy currently has an inflation rate of 7%.
Moreover, the slope of the economy's Phillips Curve is 1/2.
Over the next 3 years, short-run output is +4 percent, O
percent, and -2 percent. Based on this information you know
that the inflation rate at the end of the third year is
percent.
13. Suppose the Phillips curve is represented by the following equation: πt − πt−1 = 20 − 2ut. Given this information, which of the following is most likely to occur if the actual unemployment in any period is equal to 6%?
the rate of inflation will tend to increase
the rate of inflation will be constant
the rate of inflation will tend to decrease
none of the above
(19 of 20)
Study the diagram below. What is the short run unemployment rate if inflation is expected to be 8% and is actually 12%? You do not need to include the % sign in your
answer.
Inflation Rate (%)
LR Phillips Curve
14
12
10
12% expected inflation
6
IE
* 8% expected inflation
4% expected inflation
(0,0)
2
4
6 8
10 12
14
Unemployment Rate (%)
Short-run and Long-run Phillips Curves
Chapter 16 Solutions
Econ Macro (book Only)
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- 1. Assume that in an economy the phillips curve is: At = -0,8 (U-Un) + p Last year's inflation was 0,08, current inflation is 0,08, unemployment rate is 0,04 and the price shock is 0,01. What is the natural rate of unemployment? 2. The price level is 143, the inflation rate is 0,08, the nominal money supply is 12785, the nominal interest rate is 0,13 percent. Calculate the seignorage.arrow_forwardInflation at lowest rate in 5 years Inflation rate (percent per year) In September, inflation in the United Kingdom fell to 1.1% a year, its lowest in 5 years. Analysts expected an inflation rate of 1.3% a year. 1.7- Source: The New York Times, October 13, 2009 With the unemployment rate at 8 percent and the natural unemployment rate at 6 percent, sketch the short-run Phillips curve and mark on your graph the point which shows the situation in September. Label the point A. 1.5- 1.3- The unemployment rate is 8 percent and the natural unemployment rate is 6 percent. 1.1- Draw a point that shows the unemployment rate and the inflation rate in September. Label it A. Draw a point that shows the natural unemployment rate and the expected inflation 0.9 rate. Label it B. 10 12 Unemployment rate (percent of labor force) Draw the short-run Phillips curve that is consistent with these data. Label it. >>> Draw only the objects specified in the question. Selected: Delete Clear none Nextarrow_forwardInflation at lowest rate in 5 years Inflation rate (percent per year) In September, inflation in the United Kingdom fell to 1.1% a year, its lowest in 5 years. Analysts expected an inflation rate of 1.3% a year. 1.7- Source: The New York Times, October 13, 2009 With the unemployment rate at 8 percent and the natural unemployment rate at 6 percent, sketch the short-run Phillips curve and mark on your graph the point which shows the situation in September. Label the point A. 1.5- 1.3- The unemployment rate is 8 percent and the natural unemployment rate is 6 percent. 1.1- Draw a point that shows the unemployment rate and the inflation rate in September. Label it A. 0.9+ 4 8 10 12 Draw a point that shows the natural unemployment rate and the expected Unemployment rate (percent of labor force) inflation rate. Label it B. >>> Draw only the objects specified in the question. Draw the short-run Phillips curve that is consistent with these data. Label it. ofarrow_forward
- 7. The costs of disinflation 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. INFLATION RATE (Percent) 20 18 16 14 12 10 8 4 2 0 01 LRPC A SRPC 2 3 4 5 6 7 8 9 10 UNEMPLOYMENT RATE (Percent) ?arrow_forward11. Assume that an economy is governed by the Phillips curve a =n° – 0.5 (u – 0.06), where n = (P – P-1) / P-1, n° = n_1, and 0.06 is the natural rate of unemployment. Suppose that, in period zero, n= 0.03 and n° = 0.03–that is, that the economy is experiencing steady inflation at a 3-percent rate. a. Now assume that the government decides to impose whatever demand is necessary t unemployment to 0.04. Suppose the government follows this policy for periods 1 thi Create a table of a and nº for these five periods. b. Assume that, for periods 6 through 10, the government decides to hold unemployme 0.06. Create another table of a and nº for these five periods. Is there any reason to e) inflation rate to go back to 0.03? c. If the government persisted in its behavior under part a, do you think the public wou continue for long forming expectations according to n° = T-1? Why?arrow_forward15. Suppose that the relationship between inflation rate (x) and unemployment rate (u) is described by the following equation: H, - n = (m + z) – au, where m = 0.05, z = 0.04, and a = 2. In this economy, the authorities keep unemployment rate at 4% forever. a. If the modified Phillips curve describes the relationship between a and u correctly, how should "x,*" be specified? Rewrite the equation using this specification. And assuming that 7-1= 1%, compute Af, T4+1, and x4+2. b. Derive the natural rate of unemployment.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_forwardSuppose that for years East Confetti's short-run Phillips Curve was such that each 1 percentage point increase in its unemployment rate was associated with a 4 percentage point decline in its inflation rate. Then, during several recent years, the short-run pattern changed such that its inflation rate rose by 3 percentage points for every 1 percentage point drop in its unemployment rate. Graphically, did East Confetti's Phillips Curve shift upward or did it shift downward? |(Click to select) Varrow_forward4. The expectation augmented Phillips curve takes the form T = T° – 3(u – ū), %3D with the natural rate of unemployment ū = 0.04. Assume that the Okun's law holds so that a 1 percentage point increase in the unemployment rate reduces GDP by 2% of full-employment output. What is the percentage deviation of output from full- employment output if actual inflation is 9% and expected inflation is 4.5%? (а) -3%. (b) -2%. (c) 2%. (d) 3%. (Right answer)arrow_forward
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