Consider an economy with a natural unemployment rate, u, of 7%. The expectations-augmented Phillips curve is: * = Rº - 2(u - u) Assume that Okun's Law holds so that a 1 percentage point increase in the unemployment rate maintained for one year reduces GDP by 2% of full employment output. Note: Okun's Law can be expressed as: Y-Y Y = -2(u-u) a. Consider a two-year disinflation. In the first year actual inflation, x, is 6% and expected inflation, x, is 10%. What is the first year unemployment rate? 9% (Enter your response as a percentage rounded to one decimal place) By what percentage does output exceed full employment output? -4% (Your answer should be a negative number if output is less than full employment output. Enter your response as a percentage rounded to one decimal place.) b. In the second year actual inflation, x, is 1% and expected inflation, xº, is 1%. What is the second year unemployment rate? 7% (Enter your response as a percentage rounded to one decimal place) By what percentage does output exceed full employment output? 0% (Your answer should be a negative number if output is less than full employment output. Enter your response as a percentage rounded to one decimal place.) What is the sacrifice ratio for this disinflation? (Enter your response rounded to two decimal places, use only positive values)
Consider an economy with a natural unemployment rate, u, of 7%. The expectations-augmented Phillips curve is: * = Rº - 2(u - u) Assume that Okun's Law holds so that a 1 percentage point increase in the unemployment rate maintained for one year reduces GDP by 2% of full employment output. Note: Okun's Law can be expressed as: Y-Y Y = -2(u-u) a. Consider a two-year disinflation. In the first year actual inflation, x, is 6% and expected inflation, x, is 10%. What is the first year unemployment rate? 9% (Enter your response as a percentage rounded to one decimal place) By what percentage does output exceed full employment output? -4% (Your answer should be a negative number if output is less than full employment output. Enter your response as a percentage rounded to one decimal place.) b. In the second year actual inflation, x, is 1% and expected inflation, xº, is 1%. What is the second year unemployment rate? 7% (Enter your response as a percentage rounded to one decimal place) By what percentage does output exceed full employment output? 0% (Your answer should be a negative number if output is less than full employment output. Enter your response as a percentage rounded to one decimal place.) What is the sacrifice ratio for this disinflation? (Enter your response rounded to two decimal places, use only positive values)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Consider an economy with a natural unemployment rate, u, of 7%. The expectations-augmented Phillips curve is:
* = R² - 2(u - u)
Assume that Okun's Law holds so that a 1 percentage point increase in the unemployment rate maintained for one year reduces GDP
by 2% of full employment output. Note: Okun's Law can be expressed as:
-2(u - ū)
Y - Y
Y
a. Consider a two-year disinflation. In the first year actual inflation, x, is 6% and expected inflation, zº, is 10%.
What is the first year unemployment rate? 9% (Enter your response as a percentage rounded to one decimal place)
By what percentage does output exceed full employment output? -4% (Your answer should be a negative number if output is
less than full employment output. Enter your response as a percentage rounded to one decimal place.)
b. In the second year actual inflation, x, is 1% and expected inflation, xº, is 1%.
What is the second year unemployment rate? 7% (Enter your response as a percentage rounded to one decimal place)
By what percentage does output exceed full employment output? 0% (Your answer should be a negative number if output is less
than full employment output. Enter your response as a percentage rounded to one decimal place.)
What is the sacrifice ratio for this disinflation? (Enter your response rounded to two decimal places, use only positive values)
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