Initially, the economy is operating at the natural unemployment rate of 4%, and the inflation rate is also 4%. People correctly anticipate that the Fed's hike in the discount rate will cause the inflation rate to fall to 2%. According to rational expectations, inflation , and the unemployment rate 4% in the short run. In the long run, the unemployment rate will be 4%.

Initially, the economy is operating at the natural unemployment rate of 4%, and the inflation rate is also 4%. People correctly anticipate that the Fed's hike in the discount rate will cause the inflation rate to fall to 2%. According to rational expectations, inflation , and the unemployment rate 4% in the short run. In the long run, the unemployment rate will be 4%.

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

Which of the following is true about the Phillips curve? The empirical relationship between unemployment and inflation in the US disappeared after the 1970s. This means that the theoretical Phillips curve does not represent the world well. For a researcher to identify the theoretical Phillips curve from empirical data, the economy must be subject to supply shocks. The empirical Phillips curve implies that a government must choose between either low unemployment and high inflation or high unemployment and low inflation. When inflation expectations adjust, the negative empirical correlation between inflation and unemployment might disappear.
In a certain economy, the expectations-augmented Phillips curve is π = T²2(u - u) and u=0.06. a. Graph the Phillips curve of this economy for an expected inflation rate of 0.10. If the central bank chooses to keep the actual inflation rate at 0.10, what will be the unemployment rate?
Briefly describe the key assumption, implication and conclusion of the Pure Expectations theory. (60-80 words)
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?
According to the Rational Expectation Theory, A) people reformulate their expectations of inflation once a change in the inflation rate has occurred. B) people never reformulate their expectations of inflation. C) expectations of inflation are based only on past values of the inflation rate. D) people reformulate their expectations of inflation once a change in policy has occurred. E) none of the above.
Inflation redistributes wealth from creditors to debtors when inflation is Question 10 options: high, whether it is expected or not. low, whether it is expected or not. unexpectedly high. unexpectedly low.
True, false or obscure. Justify your conclusion. a) It is desirable to have inflation as close to zero as possible b) High inflation means low unemployment c) The turnover rate of money decreases when nominal interest rates are high d) The probability of the unemployed finding a job is greater if more people change jobs during a given period e) Sticky wages make the Phillips curve steep
Suppose that the government is considering enacting an expansionary policy in 2023 that would shift aggregate demand in 2024 from ADAADA to ADBADB. This would cause a (move along , shift of) the short-run Phillips curve, resulting in (increase, decrease) in the inflation rate and (increase, decrease) in the unemployment rate.
Under adaptive expectations theory, people persistently: underestimate inflation when it is slowing down. Ooverestimate inflation when it is accelerating. underestimate inflation when it is accelerating. adapt to the prevailing inflation rate.
An implication of the Rational Expectation Theory is that A) rational expectations of inflation are reformulated sooner than adaptive expectations of inflation. B) changes in how the inflation variable moves over time will not affect how expectations are formed. C) people can always accurately assess the actual rate of inflation. D) people always underestimate the future rate of inflation. E) people always overestimate the future rate of inflation.
Compared to the Adaptive Expectations Theory, the Rational Expectations Theory A) asserts the same conclusions about policy activism.B) implies that policy activism is less effectiveC) implies that policy activism is more effective.D) asserts that people cannot anticipate the effects of policies in advance.E) the inflation arising from an expansionary policy will be less.