5. An oil shock: Consider an economy that begins with output at its potential level and a relatively high inflation rate of 6%, reflecting some recent oil price shocks. As the head of the Federal Reserve, your job is to pick a sequence of short-run output levels that will get the rate of inflation back down to 3% no later than 3 years from now. Your expert staff offers you the following menu of policy choices: -Short-run output- -Inflation- Year 2 3% 3% 4% Option 1 2 ETUA 3 Year 1 -6% 120m - 4% NOMIN -2% Year 2 0 BEVEST -2% of evingut -2% Year 3 0 101201 0 -2% Year 1 3% ette 4% o ba 5% di (d) Explain the general trade-off that policymakers are faced with according to the Phillips curve. Year 3 3% 3% 0500 3% (a) According to these numbers, what is the slope of the Phillips curve? (b) If you as a policymaker cared primarily about output and not much about the inflation rate, which option would you recommend? Why? (c) If you cared primarily about inflation and not much about output, which option would you recommend? Why? Slobom nm-noda Exercises 261

5. An oil shock: Consider an economy that begins with output at its potential level and a relatively high inflation rate of 6%, reflecting some recent oil price shocks. As the head of the Federal Reserve, your job is to pick a sequence of short-run output levels that will get the rate of inflation back down to 3% no later than 3 years from now. Your expert staff offers you the following menu of policy choices: -Short-run output- -Inflation- Year 2 3% 3% 4% Option 1 2 ETUA 3 Year 1 -6% 120m - 4% NOMIN -2% Year 2 0 BEVEST -2% of evingut -2% Year 3 0 101201 0 -2% Year 1 3% ette 4% o ba 5% di (d) Explain the general trade-off that policymakers are faced with according to the Phillips curve. Year 3 3% 3% 0500 3% (a) According to these numbers, what is the slope of the Phillips curve? (b) If you as a policymaker cared primarily about output and not much about the inflation rate, which option would you recommend? Why? (c) If you cared primarily about inflation and not much about output, which option would you recommend? Why? Slobom nm-noda Exercises 261

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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Question

100%

5. An oil shock: Consider an economy that begins with output at its potential level
and a relatively high inflation rate of 6%, reflecting some recent oil price shocks.
As the head of the Federal Reserve, your job is to pick a sequence of short-run
output levels that will get the rate of inflation back down to 3% no later than
3 years from now. Your expert staff offers you the following menu of policy choices:
-Short-run output-
-Inflation-
Year 2
3%
3%
4%
Option
1
2
ETUA
3
Year 1
-6%
120m
- 4%
NOMIN
-2%
Year 2
0
BEVEST
-2%
of evingut
-2%
Year 3
0
101201
0
-2%
Year 1
3%
ette
4%
o ba
5%
di
(d) Explain the general trade-off that policymakers are faced with according
to the Phillips curve.
Year 3
3%
3%
0500
3%
(a) According to these numbers, what is the slope of the Phillips curve?
(b) If you as a policymaker cared primarily about output and not much about
the inflation rate, which option would you recommend? Why?
(c) If you cared primarily about inflation and not much about output, which
option would you recommend? Why?
Slobom nm-noda
Exercises 261

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