2. Suppose that an economy has the Phillips curve T = T-1 - 0.5(u – 5). a. What is the natural rate of unemployment? b. Graph the short-run and long-run relation- ships between inflation and unemployment. c. How much cyclical unemployment is necessary to reduce inflation by 4 percentage points? Using Okun's law, compute the sacrifice ratio.

2. Suppose that an economy has the Phillips curve T = T-1 - 0.5(u – 5). a. What is the natural rate of unemployment? b. Graph the short-run and long-run relation- ships between inflation and unemployment. c. How much cyclical unemployment is necessary to reduce inflation by 4 percentage points? Using Okun's law, compute the sacrifice ratio.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Inflation and unemployment data for Acadia can be found in the table below. Year 2018 2019 2020 ion Rate (%) 5 Inflation Rate (%) + 4.7 2.6 3.5 a. Draw a graph showing the Phillips curve for Acadia based on the values for inflation and unemployment in this economy from 2018 to 2020. Plot 3 points in total to draw the Phillips curve for Acadia below. Plot the plotting points in the order 2018, 2020 and then 2019. Unemployment Rate (%) Phillips Curve for Acadia 5.7 8.9 6.8 Tools Phillips Curve Ⓡ
Suppose πt = πt−1 −2(ut −0.04) is the Phillips Curve equation in the economy. Answer thefollowing questions.a. What is the natural rate of unemployment?b. Graph the short run and the long run relationship between inflation and unemployment.c. How much cyclical unemployment is necessary to reduce inflation by 10 percentagepoint?d. The inflation is running at 12 percent. The Central Bank wants to reduce it to 9 percent.Give two scenarios that will achieve the goal.
a. Suppose that the economy is at an inflation rate such that unemployment is above the natural rate. How does the economy return to the natural rate of unemployment? b. Suppose the central bank wants to permanently reduce the inflation rate. What are the possible ways of doing so? c. What information does the sacrifice ratio tell us about the consequences of reducing inflation? B v E v + v Pa... ... III
Assume that expected inflation is based on the following: n = 0+1. An increase in 8 will cause a. a reduction in the natural rate of unemployment. b. an increase in the natural rate of unemployment. c. inflation in period t to be more responsive to changes in unemployment in period t. d. None of the other answers is correct. e. no change in the natural rate of unemployment.
A government is considering introducing a new trade policy that would rescind existing free trade agreements and impose import tariffs. -what effect would this have on natural unemployment rate -whould this shift the phillips curve up or down?
The Phillips curve shows that, in the short-run: A. expected changes in aggregate demand produce a positive relationship between inflation and unemployment. B. unexpected changes in aggregate demand produce a positive relationship between inflation and unemployment. C. expected changes in aggregate demand produce an inverse relationship between inflation and unemployment. D. unexpected changes in aggregate demand produce an inverse relationship between inflation and unemployment.
Consider the Friedman-Phelps model of the Phillips Curve as discussed in lecture. Assume the economy is currently at Y-full employment. When the Fed sells government securities to the public, and there are no other exogenous shocks to the economy, which one of the following is predicted to happen? The actual inflation rate increases, and the unemployment rate increases permanently. O The actual inflation rate increases, and the unemployment rate increases first and then gradually goes back to the natural rate of unemployment. O The actual inflation rate decreases, and the unemployment rate increases first and then gradually goes back to the natural rate of unemployment. The actual inflation rate decreases, and the unemployment rate increases permanently. The actual inflation rate decreases, and the unemployment rate decreases first and then gradually goes back to the natural rate of unemployment.
2. Analyze the effects of the following developments on both the short-run and the long-run Phillips curves. Use the graphs and explain in detail: a) a rise in the natural rate of unemployment b) a substantial increase in the price of energy
Problem 2: Production Model Suppose that firms produce according to the following production function: Y = At(K₂) (Lt) (N₁) ¹-a-B where At captures productivity, K, capital, L, labor, and N, land available for business use. We can define wt as wages, rk as rental rates for capital, and r as rental rates for land usage. (a) (b) Write down the firm's profit maximizing problem. Be sure to identify the vari- ables the firm can choose and which it takes as given. Are there increasing returns to labor (L)? Land (N)? Explain.
.) Suppose people's inflation expectations are subject to ran- dom shocks: at time t-1, expected inflation in time t is Et-1t = πt-1+t-1 where n-1 is a random shock with mean zero but deviates from zero when some event beyond past inflation causes expected inflation to change. Also, Ett+1 = πt + nt.
2. The Phillips curve in the short run and long run In the year 2023, aggregate demand and aggregate supply in the fictional country of Gurder are represented by the curves AD2023 and AS on the following graph. Suppose the natural rate of output in this economy is $6 trillion. NOTE: OPTIONS FOR BLANKS ARE: 1. The short-run Phillips curve is ______ (a vertical OR a downward sloping OR an upward sloping) 2. Because output at point C is _____ (less than OR greater than OR equal to) the natural rate of output, the unemployment rate associated with outcome C is _____ (less than OR greater than OR equal to) 3. This line is _____ (a vertical OR a downward sloping OR an upward sloping)
If a central bank had to give up its discretion and follow a rule that required it to keep inflation low, a. the short-run Phillips curve would shift up. b. the short-run Phillips curve would shift down. c. the long-run Phillips curve would shift right. d. the long-run Phillips curve would shift left.