As described in the chapter, the Federal Reserve in 2008 faced a decrease in aggregate demandcaused by the housing and financial crises and a decrease in short-run aggregate supply caused byrising commodity prices.Starting from a long-run equilibrium, illustrate the effects of these two changes on aggregatesupply and aggregate demand on the following graph. Then, on the subsequent graph, indicatewhat happens on a Phillips-curve diagram.LRASAggregate SupplyAggregate DemandXE0LRPCSRPCUnemployment RatePrice LevelInflation RateQuantity of OutputAggregate DemandEquilibrium output will rise.The effect on the inflation rate will be ambiguous.The price level will fall.Unemployment will rise.Aggregate SupplyLRASLong-Run EquilibriumSRPCLRPCLong-Run Equilibrium(?)Which of the following is true as a result of the two changes in aggregate demand and aggregatesupply? (Note: Do not consider the magnitudes of the shifts given on the preceding graphs. Thinkonly about the directions of the shifts.) Check all that apply.Suppose the Fed responds quickly to these shocks and adjusts monetary policy to keepunemployment and output at their natural rates.?On each of the previous graphs, adjust the curve or curves (if necessary) to show the long-runresults, and place a black point (plus symbol) on the point representing the new long-runequilibrium.True or False: In these situations, the Fed always takes the course of action you selected.TrueFalse

As described in the chapter, the Federal Reserve in 2008 faced a decrease in aggregate demand caused by the housing and financial crises and a decrease in short-run aggregate supply caused by rising commodity prices. Starting from a long-run equilibrium, illustrate the effects of these two changes on aggregate supply and aggregate demand on the following graph. Then, on the subsequent graph, indicate what happens on a Phillips-curve diagram. Price Level Inflation Rate LRAS Aggregate Supply LRPC Aggregate Demand Quantity of Output Unemployment Rate Aggregate Demand Aggregate Supply LRAS + Long-Run Equilibrium SRPC LRPC + Long-Run Equilibrium (? ?

As described in the chapter, the Federal Reserve in 2008 faced a decrease in aggregate demand caused by the housing and financial crises and a decrease in short-run aggregate supply caused by rising commodity prices. Starting from a long-run equilibrium, illustrate the effects of these two changes on aggregate supply and aggregate demand on the following graph. Then, on the subsequent graph, indicate what happens on a Phillips-curve diagram. Price Level Inflation Rate LRAS Aggregate Supply LRPC Aggregate Demand Quantity of Output Unemployment Rate Aggregate Demand Aggregate Supply LRAS + Long-Run Equilibrium SRPC LRPC + Long-Run Equilibrium (? ?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Answer ONLY parts C and D.
MA4. 13. If the equation for a country's Phillips curve is π = 0.05 – 0.8(u – 0.05), where π is the rate of inflation and u is the unemployment rate, what is the short-run inflation rate when unemployment is 3 percent (0.03)? A) .066 B) -.056 C) -.066 D) .056 11. The aggregate supply equation is Y = Y + α(P – EP). Assume that Y is 2,000, α = 200, P = 1.12 and EP = 1.00. What is the value of Y? A) 2,232 B) 2,024 C) 2,400 D) 2,012 9. If policymakers announce in advance how policy will respond to various situations but then renege on their announcements, this a problem of: A) policy by rule. B) policy by discretion. C) time inconsistency of policy. D) monetary policy. 10. According to the sticky-price model, output will be above the natural level if: A) firms expect a high price level and the demand for goods is high. B) the proportion of firms with flexible prices equals the proportion of firms with sticky prices. C) the price level is above the…
true or false Suppose that the central bank lost credibility in the sense that people no longer believe its inflation target (that is, inflation expectations are not `anchored’). In this case, both short-run output and long-run output do not increase in response to a permanently higher inflation target.
The following table describes the aggregate demand curve, where real GDP is expressed as the percent deviation from potential GDP and inflation is expressed as a percentage: Real GDP 2.0 1.0 0.0 -1.0 -2.0 Inflation 19 3.0 4.0 5.0 7.0 9.0 Due to a price shock, inflation increases by 2%. In the long run, what will real GDP be (expressed as the percent deviation from potential GDP)?
Assume that a country's economy is in equilibrium. a) () Using a correctly labeled AD/AS graph, show how an increase in the price of gasoline, an important input of production, will affect the following in the short run. (i) Real output :- (ii) Price level-Using a correctly labeled graph, show the same effect on the Phillips curve. () Central bank of the country responds to the higher price of oil by increasing the money supply. (i ) ()Explain the process by which the increase in the money supply will affect the aggregate demand in the short run. (ii) (Indicate on the AD/AS graph, how the increase in the money supply will affect real output and the price level. d) () Now assume that instead of using monetary policy in response to the gasoline price increase, the government reduces business taxes, which results in lower production costs. Using a new correctly labeled graph, show the effect of the reduction in business taxes on the following. (i) () Real output - (ii) () Price levele) (…
Question 3: The Phillips Curve and Inflation Expectations Consider the following two modifications to the Phillips Curve equation we studied in class The Federal Reserve has been successful in achieving stable inflation around its target rate of 2% per year. Therefore, we may expect inflation expectations to be "anchored" in the sense that private sector agents expect inflation to eventually return to target over the long-run after any economic shocks. Suppose that inflation expectations are not adaptive, but are anchored to the inflation target as follows: π = (1-р)π + pπt-1 This equation says that firms forecast inflation as a weighted average of the inflation target and yesterday's inflation Tt-1. Note that adaptive expectations are a special case of this where the weight on yesterday's inflation p = 1. i. ii. Many economists have documented that the empirical Phillips Curve is almost flat. Therefore, suppose that the Phillips Curve does not depend on the current state of the…
Let's say that at some time in the past the central bank of a nation raised real interest rates to get inflation under control. Inflation has stayed low now for a couple of years. As people in the economy build this now-lower inflation into their expectations, the economy will move further away from the LR value of output we'll move to the right along the same Phillips Curve the Fed will shift the MP curve further upward the Phillips curve will shift rightward
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Homework: Chapter 27 1. Aggregate demand, aggregate supply, and the Phillips curve In the year 2020, aggregate demand and aggregate supply in the fictional country of Bartak are represented by the curves AD20 and AS on the following graph. The price level is 102. The graph also shows two possible outcomes for 2021. The first potential aggregate demand curve is given by the ADA curve, resulting in the outcome illustrated by point A. The second potential aggregate demand curve is given by the ADB curve, resulting in the outcome illustrated by point B. PRICE LEVEL 106 AS 107 106 B 105 104 AD 2020 103 102 101 19V 100 D 10 AD OUTPUT (Trillions of dollars) ADB 12 14 (?) Suppose the unemployment rate is 6% under one of these two outcomes and 3% under the other. Based on the previous graph, you would expect to be associated with the lower unemployment rate (3%). outcome B outcome A emand is high in 2021, and the economy is at outcome B, the inflation rate between 2020 and 2021 is Based on your…
Suppose an economy with Phillips curve An = 0.5(u 0.06), has a current inflation rate of 10% Propose a mechanism the central bank can use to lower the inflation rate to 5% and determine the new short-run unemployment rate. Graph the Phillips curve, then show and describe: a. how the economy responds to an exogenous jump in prices b. how the Philips curve responds in the long run.
Problem 2. Consider the following Phillips Curve n = En – 0.6(u – 0.05) a) Explain the above Philips Curve briefly. b) Assume that Ex = 0.02. Draw the graph of the Phillips curve. What is the slope of the curve? What are the long-run unemployment rate and the long-run inflation rate? c) Is there any possibility that a government can decrease the inflation rate without any change in the unemployment rate? If yes, how? Explain it. d) Is there any possibility that a government can increase the inflation rate without any change in the unemployment rate? If yes, how? Explain it. e) Considering the Philips Curve as T = 0.02 – 0.6(u – 0.05), and the government announces that it implements an expansionary monetary policy: • el) Describe the Lucas Critique. • e2) Considering the Locus Critique, do you think that the above Philips curve is a good equation to study the relationship between inflation and unemployment? Why? Explain it.
3. An economy has the following equation for the Phillips curve: n = En – 0.5(u – 6) People form expectations of inflation by taking a weighted average of the previous two years of inflation: En = 0.7 T.1 + 0.3 r.2 Okun's law for this economy is: (Y - Y.)/ Y.j= 3.0 – 2.0 (u-u.1) The economy begins at its natural rate of unemployment with a stable inflation rate of 5 percent. e. On the same graph you used in part (b), graph the short-run tradeoff the economy faces at the end of this 10-year period. Label the point where the economy finds itself as point C. (Again, use numerical values.) f. Compare the equilibrium before the recession with the new long-run (period ten) equilibrium. How much does inflation change? How many percentage points of output are lost during the transition? What is this economy's sacrifice ratio? 6% =E * -0.5 / U-c) ス E 大 - d.s u+3 A: (EX + 3 ) + (-o.so) CEX +3 ) - 0-5 u (6,5) Phillips curve 2. 1 2 3 4 unemployment (u). C D F G H K 1 Variables Year 1 Year 2 Year 3…