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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The following graph depicts the short-run and long-run Phillips curves (SRPC and LRPC) for a hypothetical economy in long-run macroeconomic equilibrium at point A, where the natural unemployment rate is 6% and the current inflation rate is 8% per year.
Can you please help me with D) and E) please and thanks.
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.
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How does the modern view of the Phillips curve differ from the earlier view? ___The early view of the Phillips curve suggested that the Phillips curve shifts with changes in inflation expectations. Such a view failed to recognize that the Phillips curve is a fixed inverse relationship between inflation and unemployment. ___The early view of the Phillips curve suggested that the Phillips curve is fixed, with higher rates of inflation associated with lower rates of unemployment, and vice versa. Such a view failed to recognize the importance of inflation expectations in determining the position of the short-run Phillips curve. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
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Can you please help me with A) B) and C) please and thanks in advanced.
Suppose that the public expects that inflation will be high and that episodes of high unemployment are politically difficult for policymakers. Is it possible for the economy to be at a bad equilibrium as a result of people’s expectations of inflation (i.e. expectations trap)? Explain in terms of a Phillips Curve diagram.
Use the following information to answer the next two questions.. Consider the Phillips curve л₁=₂-E(U-U*) with E-1.2, u*-0.06, and n=0.06. Suppose that up-u". Suppose the current government pressures the RBA to bring the economy to an unemployment rate of 0.04 for the next period. With adaptive expectations, what inflation rate should the RBA target? (enter "x" without the quotes if there is not an inflation rate that can produce the target unemployment.) Report your answer as a decimal fraction up to two decimal points.
In a certain economy, the Dynamic Aggregate Supply (DAS) line is represented by the function = - π₁ = Ę ₁ = ₁ π + α ( Y₁ − Ÿ) + D and the inflation expectations formation mechanism is adaptive, that is, E₁+1 Absent a supply shock (v₁ = 0), in a figure representing period t inflation rate, π, on the vertical axis, and period t output, Y₁, on the horizontal axis, the period t DAS line will pass through the pair of points, : OA. (-1) B. (α, Y) ○ C. (Y) D. (πt, Yt)
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?
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…