Graph the short-run tradeoff between inflation and unemployment that this economy faces. Label the point where the economy begins as A. (Be sure to give numerical values for point A.) A fall in aggregate demand leads to a recession, causing the unemployment rate to rise 4 percentage points above its natural rate. On your graph in part (b), label the point the economy experiences that year as point B.(Be sure to give numerical values.) Unemployment remains at this high level for two years (the initial year described in part (c) and one more), after which it returns to its natural rate. Create a table showing unemployment, inflation, expected inflation, and output growth for 5 years beginning two years before the recession.
1. An economy has the following equation for the
π = Eπ − 0.5(u − 6)
People form expectations of inflation by taking a weighted average of the previous two years of inflation:
Okun’s law for this economy is:
Eπ = 0.7π−1 + 0.3π−2
(Y −Y−1)/(Y-1)=3.0−2.0(u−u−1)
Th economy begins at its natural rate of
Graph the short-run tradeoff between inflation and unemployment that this economy faces. Label the point where the economy begins as A. (Be sure to give numerical values for point A.)
A fall in aggregate
Unemployment remains at this high level for two years (the initial year described in part (c) and one more), after which it returns to its natural rate. Create a table showing unemployment, inflation, expected inflation, and output growth for 5 years beginning two years before the recession.
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