Problem 1. Country A has the following Philips Curve: π- Eπ- 0.75 (u-0.05) a) What is the natural rate of unemployment for Country A? b) Assume Eπ=0.03, graph the short-run and long-run relationshipbetween inflation and unemployment. c) Assume that the social cost of unemployment and inflation isdescribed by the following loss function: L = u +0.05m² The central bank would like to minimize this loss. Calculate the optimal level of inflation that minimizes this loss function. d) i) Define the sacrifice ratio. ii) Assume that the inflation rate in both country A and country B ishigher than the optimal inflation rate you obtained in part c). The public in country A believes that their policymakers are committed to targeting the optimal inflation rate you obtained in part c), while the public in country B is skeptical about their policymakers' intention to reduce inflation and achieve the optimal inflation rate. According to the rational-expectations approach, the sacrifice ratio will be lower in country A than in country B. Explain why this might be true.
Problem 1. Country A has the following Philips Curve: π- Eπ- 0.75 (u-0.05) a) What is the natural rate of unemployment for Country A? b) Assume Eπ=0.03, graph the short-run and long-run relationshipbetween inflation and unemployment. c) Assume that the social cost of unemployment and inflation isdescribed by the following loss function: L = u +0.05m² The central bank would like to minimize this loss. Calculate the optimal level of inflation that minimizes this loss function. d) i) Define the sacrifice ratio. ii) Assume that the inflation rate in both country A and country B ishigher than the optimal inflation rate you obtained in part c). The public in country A believes that their policymakers are committed to targeting the optimal inflation rate you obtained in part c), while the public in country B is skeptical about their policymakers' intention to reduce inflation and achieve the optimal inflation rate. According to the rational-expectations approach, the sacrifice ratio will be lower in country A than in country B. Explain why this might be true.
Macroeconomics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506756
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter10: Dynamic Change, Economic Fluctuations, And The Ad-as Model
Section: Chapter Questions
Problem 6CQ
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Can you please answer D)
Transcribed Image Text:Problem 1. Country A has the following Philips Curve:
n= En - 0.75 (u-0.05)
a) What is the natural rate of unemployment for Country A?
b) Assume En=0.03, graph the short-run and long-run relationshipbetween
inflation and unemployment.
c) Assume that the social cost of unemployment and inflation isdescribed
by the following loss function:
L = u + 0.0572
The central bank would like to minimize this loss. Calculate the optimal level
of inflation that minimizes this loss function.
d) i) Define the sacrifice ratio.
ii) Assume that the inflation rate in both country A and country B ishigher
than the optimal inflation rate you obtained in part e). The public in country A
believes that their policymakers are committed to targeting the optimal
inflation rate you obtained in part c), while the public in country B is skeptical
about their policymakers' intention to reduce inflation and achieve the
optimal inflation rate. According to the rational-expectations approach, the
sacrifice ratio will be lower in country A than in country B. Explain why this
might be true.
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