Assume the economy is described by the following equations: Phillips Curve: Okun's Law: Tt = Tt-1-1.5% - (ut-0.05) AY/Y3% - 3 (ut-0.05) a) How could we know that expectations are not rational in this setup? b) Imagine that last year's inflation is equal to 11%. Imagine the Federal Reserve raises unemployment to 8% and keeps it there until inflation reduces to 2%. How many years of 8% unemployment would it take for inflation to reach 2%? c) What values of inflation would we observe over time as inflation reached 2%? d) How much output is lost to bring down inflation to 2%?

Assume the economy is described by the following equations: Phillips Curve: Okun's Law: Tt = Tt-1-1.5% - (ut-0.05) AY/Y3% - 3 (ut-0.05) a) How could we know that expectations are not rational in this setup? b) Imagine that last year's inflation is equal to 11%. Imagine the Federal Reserve raises unemployment to 8% and keeps it there until inflation reduces to 2%. How many years of 8% unemployment would it take for inflation to reach 2%? c) What values of inflation would we observe over time as inflation reached 2%? d) How much output is lost to bring down inflation to 2%?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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