Homework Help is Here – Start Your Trial Now!
Business
Economics
Noria's economy is in short-run equilibrium with an inflationary gap of $270 billion, and the marginal propensity to consume is 0.9. The expected inflation rate is 7%, and the natural rate of unemployment is 9%. (a) Based on the Phillips curve model, is the actual inflation rate greater than, less than, or equal to the expected inflation rate of 7% in Noria? Explain. (b) Assume the government takes no policy action with regard to the state of Noria's economy. (i) What will happen to inflationary expectations in the long run? Explain. (ii) How will the long-run adjustment process be represented in the aggregate demand-aggregate supply model? Explain.

Noria's economy is in short-run equilibrium with an inflationary gap of $270 billion, and the marginal propensity to consume is 0.9. The expected inflation rate is 7%, and the natural rate of unemployment is 9%. (a) Based on the Phillips curve model, is the actual inflation rate greater than, less than, or equal to the expected inflation rate of 7% in Noria? Explain. (b) Assume the government takes no policy action with regard to the state of Noria's economy. (i) What will happen to inflationary expectations in the long run? Explain. (ii) How will the long-run adjustment process be represented in the aggregate demand-aggregate supply model? Explain.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
See similar textbooks
icon
Related questions
Question

please answer the following questions based on marcroeconomic 

 

Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to "Calculate," you must show how you arrived at your final answer. Noria's economy is in short-run equilibrium with an inflationary gap of $270 billion, and the marginal propensity to consume is 0.9. The expected inflation rate is 7%, and the natural rate of unemployment is 9%. (a) Based on the Phillips curve model, is the actual inflation rate greater than, less than, or equal to the expected inflation rate of 7% in Noria? Explain. (b) Assume the government takes no policy action with regard to the state of Noria's economy. (i) What will happen to inflationary expectations in the long run? Explain. (ii) How will the long-run adjustment process be represented in the aggregate demand-aggregate supply model? Explain. (c) Assume that instead of waiting for the long-run adjustment, the government of Noria is considering using fiscal policy to address the inflationary gap of $270 billion. (i) If the government chooses to decrease its deficit spending, calculate the minimum change in government spending required to decrease aggregate demand by the amount of the inflationary gap. Show your work. (ii) How will the effect of the government's action in part (c)(i) be represented in the Phillips curve model? Explain. (iii) If the government chooses to increase income taxes instead of decreasing its spending, calculate the minimum change in income taxes required to decrease aggregate demand by the amount of the inflationary gap. Show your work. (iv) Now suppose instead that the government wants to maintain a balanced budget and increases both government spending and income taxes by $240 billion. Will this policy make the output gap smaller, make the output gap larger, or have no effect on the output gap? Explain. (d) Suppose the government chose to implement only the policy described in part (c)(i). Based on loanable funds market analysis, what will happen to each of the following? (i) Real interest rates in Noria. Explain. (ii) Private savings. Explain.
Transcribed Image Text:Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to "Calculate," you must show how you arrived at your final answer. Noria's economy is in short-run equilibrium with an inflationary gap of $270 billion, and the marginal propensity to consume is 0.9. The expected inflation rate is 7%, and the natural rate of unemployment is 9%. (a) Based on the Phillips curve model, is the actual inflation rate greater than, less than, or equal to the expected inflation rate of 7% in Noria? Explain. (b) Assume the government takes no policy action with regard to the state of Noria's economy. (i) What will happen to inflationary expectations in the long run? Explain. (ii) How will the long-run adjustment process be represented in the aggregate demand-aggregate supply model? Explain. (c) Assume that instead of waiting for the long-run adjustment, the government of Noria is considering using fiscal policy to address the inflationary gap of $270 billion. (i) If the government chooses to decrease its deficit spending, calculate the minimum change in government spending required to decrease aggregate demand by the amount of the inflationary gap. Show your work. (ii) How will the effect of the government's action in part (c)(i) be represented in the Phillips curve model? Explain. (iii) If the government chooses to increase income taxes instead of decreasing its spending, calculate the minimum change in income taxes required to decrease aggregate demand by the amount of the inflationary gap. Show your work. (iv) Now suppose instead that the government wants to maintain a balanced budget and increases both government spending and income taxes by $240 billion. Will this policy make the output gap smaller, make the output gap larger, or have no effect on the output gap? Explain. (d) Suppose the government chose to implement only the policy described in part (c)(i). Based on loanable funds market analysis, what will happen to each of the following? (i) Real interest rates in Noria. Explain. (ii) Private savings. Explain.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps with 1 images

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Follow-up Questions
Read through expert solutions to related follow-up questions below.
Follow-up Question

Can you solve c and d?

Solution
Bartleby Expert
SEE SOLUTION
Knowledge Booster
Correlation Coefficient
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education
SEE MORE TEXTBOOKS