3. A nation consists of 2 political parties, Democrats and Republicans. The Democrats care more about unemployment than Republicans, and Republicans care more about inflation than Democrats. When Democrats hold power, they choose an inflation rate, tp and when the Republicans hold power, they choose an inflation rate, TR. Phillips's curve is: t, = n - 1.5 (u - Un). We assume that: t, > TR.Natural unemployment rate: un = 5%. An election is about to be held. Assume that expectations about inflation for the coming year are formed before the election. (Essentially, this assumption means that wages for the coming year are set before the election.) Moreover, it is assumed that the Democrats and Republicans have equal chance of winning the election. 1) Solve for expected inflation, in terms of tpand TR.

3. A nation consists of 2 political parties, Democrats and Republicans. The Democrats care more about unemployment than Republicans, and Republicans care more about inflation than Democrats. When Democrats hold power, they choose an inflation rate, tp and when the Republicans hold power, they choose an inflation rate, TR. Phillips's curve is: t, = n - 1.5 (u - Un). We assume that: t, > TR.Natural unemployment rate: un = 5%. An election is about to be held. Assume that expectations about inflation for the coming year are formed before the election. (Essentially, this assumption means that wages for the coming year are set before the election.) Moreover, it is assumed that the Democrats and Republicans have equal chance of winning the election. 1) Solve for expected inflation, in terms of tpand TR.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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
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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.
Consider a version of the Phillips curve where a proportion of wages, 1 >> 0, are now indexed to the rate of inflation. In these labor contracts, nominal wages move one-for-one with the actual price level. The remaining proportion of wages, (1-2), are set on the basis of expected inflation: nt λnt (1) et+ (m+z)-aut (2) a. Suppose that лet=πt-1. Solve for the natural rate of unemployment (the rate such that t=t-1). Is the natural rate of unemployment different as a result of wage indexation? b. Re-write the Phillips curve in terms of the difference between чt and un using the value for un you calculated in (a). How does wage indexation impact the way changes in inflation respond to deviations of the unemployment rate from the natural rate? What is the intuition for this result?
The accompanying graph depicts the Short-Run Phillips O Curve (SRPC) when the public expects no inflation in the economy. Macmillan Learning a. According to this SRPC, what would inflation be if unemployment is 9%? 0 Incorrect b. Please move the SRPC line to reflect what would happen if the public's inflation expectations increased so that they now expect the inflation rate to increase by 2%. c. If the unemployment rate is still 9%, what is the new inflation rate after this change in expectations? % 2 % Inflation rate (%) 7 6 5 4 3 2 1 0 -1 -2 -3 0 1 SRPC 2 3 4 5 6 Unemployment rate (%) 7 8 9 10
The equation of the Phillips curve from 1970 to 1995 is: -17.4-1.2u₁. The natural rate of unemployment using this curve is 6.2%. (round your answer to one decimal place) The equation of the Phillips curve from 1996 to 2018 is: x=2.8% -0.16+ Which of the following explains why the natural rate of unemployment cannot immediately be calculated from the Philips curve? A. The expression only provides Ⓡ and a. B. The equation does not include a specific value for expected inflation. C. The expression only provides (m + z) and . D. None of the above. Using the line drawing tool, accurately graph the Phillips relation=2.8% -0.16 with inflation on the vertical axis and unemployment on the horizontal axis. Carefully follow the instructions above and only draw the required object. What is the natural rate of unemployment using the relation = 2.8% -0.16u, under the assumption that the value of x=2% The natural rate of unemployment fell to 5% between 1970-1995 and 1996-2018? (round your answer to…
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28 In applying the Phillips Curve, if Congress enacts expansionary policies to reduce unemployment, the cost is Multiple Choice O O an increase in the inflation rate. a decrease in the inflation rate. an increase in productivity. a decrease in productivity.
In this Decision Point you learned a little about inflation and inflation expectations. Apply what you learned from this decision point to the following questions. Erica makes $25 per hour. Erica receives a 1.9%1.9% raise and inflation is 2.5%2.5% what happens to her real wage? Her real wage: rises by 1.9%1.9% rises by 2.5%2.5% falls by 0.6%0.6%. does not change.
If the current inflation rate is 10% and you are asked to predict the cost of decreasing it to 3% next year. 1)Will it result deflation policy or a disinflation policy? Why? 2) Give an estimate of the cost in terms of output assuming the sacrifice ratio is 4 and explain the economic cost of reducing inflation by drawing the Phillips curve. 3) If an economist says computing the cost of this policy using the sacrifice ratio is not totally correct because people are rational and they will take the new policy into account when forming expectations about the future. Explain this statement and the reason behind it by showing what happens the Phillips curve 4)if people update their expectations about the future instantaneously. How costly would it be to reduce inflation if the adjustment in expectations occurs instantaneously?
32 There is a new central bank president who wants low inflation much more than the previous president did. According to the Augmented Phillips Curve Model, in this situation, which of the following would be the most help in keep unemployment from rising in the sort run? a.People know the central bank president's true desires and believe he will stay in office for a long time b.Peoples' wage wage contracts are long-lasting. c.People know the central bank president's true desires and believe that he will only be in office for a short time. d.People think that the central bank president's desires are the same as the previous president's and believe that the new president will be in office for a short time. e.People think that the central bank president's desires are the same as the previous president's and believe that the new president will be in office for a
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