1. The economy of Whoville is described by the following equations: AD: Y = 4000+2(M/P) SRAS: Y=Y +100(P-P²) Okun's Law: (Y-Y)/Ỹ = −2(u−u”) In this economy full-employment output Y equals 6000, money supply M equals 4000, and the natural rate of unemployment u" equals 0.05. Suppose that Whoville has been in this long run equilibrium for a while and is expected to stay in the long run equilibrium with no changes to fiscal or monetary policy. Please calculate the expected price level Pe for Whoville in the long run. A totally unexpected increase in money supply occurs, raising it from 4000 to 4488. Given this unexpected increase, please calculate the short-run equilibrium values of the price level, expected price level, output, and unemployment rate (leave your answer for u as a fraction). Using what you calculated, report the values of cyclical unemployment and unanticipated inflation (leave this in fraction too). What is the slope of the expectations-augmented Phillips curve in Whoville? What is the tradeoff between unemployment and inflation for the Whoville economy?
1. The economy of Whoville is described by the following equations: AD: Y = 4000+2(M/P) SRAS: Y=Y +100(P-P²) Okun's Law: (Y-Y)/Ỹ = −2(u−u”) In this economy full-employment output Y equals 6000, money supply M equals 4000, and the natural rate of unemployment u" equals 0.05. Suppose that Whoville has been in this long run equilibrium for a while and is expected to stay in the long run equilibrium with no changes to fiscal or monetary policy. Please calculate the expected price level Pe for Whoville in the long run. A totally unexpected increase in money supply occurs, raising it from 4000 to 4488. Given this unexpected increase, please calculate the short-run equilibrium values of the price level, expected price level, output, and unemployment rate (leave your answer for u as a fraction). Using what you calculated, report the values of cyclical unemployment and unanticipated inflation (leave this in fraction too). What is the slope of the expectations-augmented Phillips curve in Whoville? What is the tradeoff between unemployment and inflation for the Whoville economy?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:1. The economy of Whoville is described by the following equations:
AD:
Y = 4000+2(M/P)
SRAS:
Y=Y +100(P-P²)
Okun's Law: (Y-Y)/Ỹ = −2(u−u”)
In this economy full-employment output Y equals 6000, money supply M equals 4000,
and the natural rate of unemployment u" equals 0.05. Suppose that Whoville has been in
this long run equilibrium for a while and is expected to stay in the long run equilibrium
with no changes to fiscal or monetary policy.
Please calculate the expected price level Pe for Whoville in the long run.
A totally unexpected increase in money supply occurs, raising it from 4000 to 4488.
Given this unexpected increase, please calculate the short-run equilibrium values of
the price level, expected price level, output, and unemployment rate (leave your
answer for u as a fraction). Using what you calculated, report the values of cyclical
unemployment and unanticipated inflation (leave this in fraction too).
What is the slope of the expectations-augmented Phillips curve in Whoville?
What is the tradeoff between unemployment and inflation for the Whoville economy?
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