Consider the US Phillips Curve for the US economy: a = x° – a(u – ua), where a = 0.3. a) If the Fed commits to having zero inflation and the public believes it, how much inflation will result from decreasing the unemployment rate by 1 percentage point below the natural rate of unemployment. b) The public stops believing the Fed and now assume expected inflation to be that of question a). How much inflation will result if the Fed tries to again to decrease the unemployment rate by 1 percentage point below the natural rate of unemployment. c) Now assume that the Fed is not going to try to intervene in the unemployment rate anymore, allowing it back to its natural rate. What would the inflation rate be if the public expect the inflation from b)? What would the inflation be in the next periods? Explain d) Explain the problem that the FED faces when the public stops believing that the target inflation will be met.
Consider the US Phillips Curve for the US economy: a = x° – a(u – ua), where a = 0.3. a) If the Fed commits to having zero inflation and the public believes it, how much inflation will result from decreasing the unemployment rate by 1 percentage point below the natural rate of unemployment. b) The public stops believing the Fed and now assume expected inflation to be that of question a). How much inflation will result if the Fed tries to again to decrease the unemployment rate by 1 percentage point below the natural rate of unemployment. c) Now assume that the Fed is not going to try to intervene in the unemployment rate anymore, allowing it back to its natural rate. What would the inflation rate be if the public expect the inflation from b)? What would the inflation be in the next periods? Explain d) Explain the problem that the FED faces when the public stops believing that the target inflation will be met.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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![Consider the US Phillips Curve for the US economy: 1 = n° – a(u – ua), where a = 0.3.
a) If the Fed commits to having zero inflation and the public believes it, how much inflation
will result from decreasing the unemployment rate by 1 percentage point below the
natural rate of unemployment.
b) The public stops believing the Fed and now assume expected inflation to be that of
question a). How much inflation will result if the Fed tries to again to decrease the
unemployment rate by 1 percentage point below the natural rate of unemployment.
c) Now assume that the Fed is not going to try to intervene in the unemployment rate
anymore, allowing it back to its natural rate. What would the inflation rate be if the public
expect the inflation from b)? What would the inflation be in the next periods? Explain
d) Explain the problem that the FED faces when the public stops believing that the target
inflation will be met.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe2d37e56-062d-4307-a0c4-38d4a416ceec%2F1ab093ba-9d36-4920-8569-4334e1dd58ac%2Fgid3tg8_processed.png&w=3840&q=75)
Transcribed Image Text:Consider the US Phillips Curve for the US economy: 1 = n° – a(u – ua), where a = 0.3.
a) If the Fed commits to having zero inflation and the public believes it, how much inflation
will result from decreasing the unemployment rate by 1 percentage point below the
natural rate of unemployment.
b) The public stops believing the Fed and now assume expected inflation to be that of
question a). How much inflation will result if the Fed tries to again to decrease the
unemployment rate by 1 percentage point below the natural rate of unemployment.
c) Now assume that the Fed is not going to try to intervene in the unemployment rate
anymore, allowing it back to its natural rate. What would the inflation rate be if the public
expect the inflation from b)? What would the inflation be in the next periods? Explain
d) Explain the problem that the FED faces when the public stops believing that the target
inflation will be met.
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