1Inflation in the period t in the economy is described by the following function Tt-0.3 + 0.06u, + Twhere T; - inflation in the period t, ut - unemployment in the period t. Inflation expectations are formedadaptively: T = 0.7Tt-1 + 0.37_1, where T is the expected inflation in the period t. Let's assume thatinitially, in the time period tis equal to TOreduction of the inflation rate to the level of 0.05, starting from the year t:unemployment rate in year t = 0 and in year t = 1.0, the inflation rate coincides with the level of inflationary expectations andT = 0.1. The Central Bank is conducting a policy of permanent (once and for all)1. Calculate the

Unemployment is a situation where the people who want a job but are not getting the job. This means…

Inflation in the period t in the economy is described by the following function π = −0.3 +0.06ut ² + π f where π - inflation in the period t, ut - unemployment in the period t. Inflation expectations are formed adaptively: π = 0.7πt-1 +0.3m_1, where is the expected inflation in the period t. Let's assume that initially, in the time period t = 0, the inflation rate coincides with the level of inflationary expectations and is equal to π = π = 0.1. The Central Bank is conducting a policy of permanent (once and for all) reduction of the inflation rate to the level of 0.05, starting from the year t = 1. Calculate the unemployment rate in year t = 0 and in year t = 1

Inflation in the period t in the economy is described by the following function π = −0.3 +0.06ut ² + π f where π - inflation in the period t, ut - unemployment in the period t. Inflation expectations are formed adaptively: π = 0.7πt-1 +0.3m_1, where is the expected inflation in the period t. Let's assume that initially, in the time period t = 0, the inflation rate coincides with the level of inflationary expectations and is equal to π = π = 0.1. The Central Bank is conducting a policy of permanent (once and for all) reduction of the inflation rate to the level of 0.05, starting from the year t = 1. Calculate the unemployment rate in year t = 0 and in year t = 1

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

Please mark true or false for the following statements. 1. When there are adaptive expectations, it implies that there is persistence (inertia) in inflation:
Demand–pull inflation occurs when increases until equilibrium output exceeds the full employment level.
Consider a version of the Phillips curve where a proportion of wages, 1 >> 0, are now indexed to the rate of inflation. In these labor contracts, nominal wages move one-for-one with the actual price level. The remaining proportion of wages, (1-2), are set on the basis of expected inflation: nt λnt (1) et+ (m+z)-aut (2) a. Suppose that лet=πt-1. Solve for the natural rate of unemployment (the rate such that t=t-1). Is the natural rate of unemployment different as a result of wage indexation? b. Re-write the Phillips curve in terms of the difference between чt and un using the value for un you calculated in (a). How does wage indexation impact the way changes in inflation respond to deviations of the unemployment rate from the natural rate? What is the intuition for this result?
Let’s see just how much high expected inflation can hurt incentives to save for the long run. Let’s assume the government takes about one‑third of every extra dollar of nominal interest you earn. You must pay taxes on nominal interest. However, if you are rational, you will care mostly about your real, after‑tax interest rate when deciding how much to save. ?i ??=?Eπ=π 23×?23×i (23×?)−?(23×i)−π Nominal interest rate Inflation (no surprises) Nominal after‑tax return Real after‑tax return 15% 12% 10% -2% 6% 3% 12% 9% 90% 87% 900% 897% Calculate the nominal and real after‑tax return for each case.Nominal interest rate = 6%, inflation = 3% Nominal after‑tax return: % Real after‑tax return: % Nominal interest rate = 12%, inflation = 9% Nominal after‑tax return: % Real after‑tax return: % Nominal interest rate = 90%, inflation = 87% Nominal after‑tax return: %…
In which situation is a program to reduce inflation likely to have the lowest costs? if the sacrifice ratio is high and the reduction is unexpected if the sacrifice ratio is high and the reduction is expected if the sacrifice ratio is low and the reduction is unexpected if the sacrifice ratio is low and the reduction is expected
Assume an economy that starts with Y = Y₂. Illustrate graphically and explain the impact of a fall in energy prices in the IS-LM-PC model with anchored expectations. Illustrate graphically, explain, and discuss the impact of the fall in energy prices depending on whether the central bank, firms, or workers have the power to adjust the economy to keep inflation at its target rate after the fall in energy prices. ་པཕབ་པ་
Consider the following 3-equation model: Y 108-2rCB +2(G-T) (1) rCB =4+1.5(\pi-\pi)+0.5(Y-Y) (2) \pi \pie+0.5(YY) (3) wherey isoutput, \pi isinflation, \pi e =\pi = 2, andY* = 100. Expected future inflation is \pi e, and Y-Y⚫ is the output gap. The variable rCB is the interest rate set by the central bank. We may interpret \pi as the central bank's inflation target. Government ex- penditure, G, and net taxes, T, are given and set by the government. (a) Which equation is the IS curve, and which is the New Keynesian Phillips curve? Provide a brief economic explanation for the relationship between \pi and \pi e in Equation (3). (b) Find inflation, output and interest rates when G = T = 5. (c) Now suppose G = 8.5 and T = 5. How are inflation, output and interest rates affected? Is the impact of the fiscal expansion on output magnified or reduced by monetary policy? Explain.
Desired consumption is Cd = 100 + 0.8Y - 500r - 0.5G, and desired investment is I d = 100 - 500r. Real money demand is Md/P = Y - 2000i. Other variables are: expected inflation = 0.05, G = 200, y
Consider the short-term model characterized by the following AS and AD curves: Ý, = à – bm(x, – ñ) (AD] and A; = x; + vỶ, + õ, (AS). The economy is in steady state at time t = -1 (that is, a-1 = ñ, ō-1 = 0, and ā = 0). It is hit by a one-time inflation shock öy = .025 at time i = 0. For now, expectations are adaptive: 7 = ,-1. You'll use the answer to this question in several follow-up questions. To keep track of your results, you should use a spreadsheet application. If you don't already have one, you can use this hyperlinked template e (it's a Google Sheet). Calculate zo assuming b = 0.5, m = 2, ñ = 0.03, and ū = 1. Enter your answer as a percentage and round to the nearest hundredth.
In a certain economy, the Dynamic Aggregate Supply (DAS) line is represented by the function = - π₁ = Ę ₁ = ₁ π + α ( Y₁ − Ÿ) + D and the inflation expectations formation mechanism is adaptive, that is, E₁+1 Absent a supply shock (v₁ = 0), in a figure representing period t inflation rate, π, on the vertical axis, and period t output, Y₁, on the horizontal axis, the period t DAS line will pass through the pair of points, : OA. (-1) B. (α, Y) ○ C. (Y) D. (πt, Yt)
Assume that the economy of Country X has an actual unemployment rate of 7%, a natural rate of unemployment of 5%, and an inflation rate of 3%. Using the numerical values given above, draw a correctly labeled graph of the short-run and long-run Phillips curves. Label the current short-run equilibrium as point B. Plot the numerical values above on the graph. Assume that the government of Country X takes no policy action to reduce unemployment. In the long run, will each of the following shift to the right, shift to the left, or remain the same? Short-run aggregate supply curve. Explain Long-run Phillips curve. Explain
If the current inflation rate is 10% and you are asked to predict the cost of decreasing it to 3% next year. 1)Will it result deflation policy or a disinflation policy? Why? 2) Give an estimate of the cost in terms of output assuming the sacrifice ratio is 4 and explain the economic cost of reducing inflation by drawing the Phillips curve. 3) If an economist says computing the cost of this policy using the sacrifice ratio is not totally correct because people are rational and they will take the new policy into account when forming expectations about the future. Explain this statement and the reason behind it by showing what happens the Phillips curve 4)if people update their expectations about the future instantaneously. How costly would it be to reduce inflation if the adjustment in expectations occurs instantaneously?