Answered: During the early 1990’s, Japan…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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During the early 1990’s, Japan experienced an asset price bubble collapse followed by a massive decrease in economic activity. At that time, Japanese inflation was running at 1.76%

a)Assuming that inflation expectations in Japan were equal to the previous period’s inflation rate, show (and explain), using the multiplier model, the labour market model, and the Phillips Curve, how the abovementioned asset price bubble collapse led to drop in economic activity in the short-run and deflationary pressure into the medium run (MR), ceteris paribus

b) Explain the concept of the zero lower bound, and show how it can lead to a deflationary spiral. Use the Fisher equation to aid your explanation.

Definition Definition Relationship between the rate of unemployment and the rate of inflation that shows that the lower the initial rate of unemployment, the greater the rise in wage rate corresponding to a given rise in the rate of unemployment. The Phillips curve assumes that the ratio between prices and nominal wage rates is constant in the short run. Presented graphically, the Phillips curve shows an inverse relationship between the rate of unemployment and the rate of inflation.

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