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Solve the following problem: The Phillips curve of an economy is defined by the ollowing relationship: TI = T + 0,08+ 0,1m – 0,5u̟ n which m is the mark-up of prices over wages. Initially the value of the mark-up is 20% but after an oil price shock, it rises to 40% (period t+1).

Solve the following problem: The Phillips curve of an economy is defined by the ollowing relationship: TI = T + 0,08+ 0,1m – 0,5u̟ n which m is the mark-up of prices over wages. Initially the value of the mark-up is 20% but after an oil price shock, it rises to 40% (period t+1).

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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I have 2 attached files: one, that are the answers to questions (a) and (b) answered by experts to answer question (c); the other file is the complete question for the purpose of facilitating the resolution of questions (d), (e) and (f) ONLY.

 

 

Solve the following problem: The Phillips curve of an economy is defined by the following relationship: T = T + 0,08 + 0,1m – 0,5u, In which m is the mark-up of prices over wages. Initially the value of the mark-up is 20%, but after an oil price shock, it rises to 40% (period t+1). (a). Find the Phillips curve and the natural rate of unemployment before the oil shock. How does the natural rate of unemployment change after the shock? (b). If expected inflation is given by Tt inflation was 2% and rose to 4% in period t, then what was the unemployment rate in the period? (C). How does your answer in (b) change after the oil shock? What happens to inflation in periods t+1, t+2 and t+3, if the authority wanted to keep unemployment at the level found in period t? (d). How do your answers in (a) and (b) change if expected inflation is given by T = 0,5Ttt-1? (e) What happens if 20% of workers have their inflation expectations indexed to past = OTtt-1 with 0 = 1 ,where initially actual inflation? (f) Analyze the inflation adjustment if in period t+3, the authority would like to return to the initial inflation of 2%. Okun's law is given by: Ut – Ut-1 = 0,2(gyt – 3%) Note: gyt is the real GDP growth rate in period t.
Transcribed Image Text:Solve the following problem: The Phillips curve of an economy is defined by the following relationship: T = T + 0,08 + 0,1m – 0,5u, In which m is the mark-up of prices over wages. Initially the value of the mark-up is 20%, but after an oil price shock, it rises to 40% (period t+1). (a). Find the Phillips curve and the natural rate of unemployment before the oil shock. How does the natural rate of unemployment change after the shock? (b). If expected inflation is given by Tt inflation was 2% and rose to 4% in period t, then what was the unemployment rate in the period? (C). How does your answer in (b) change after the oil shock? What happens to inflation in periods t+1, t+2 and t+3, if the authority wanted to keep unemployment at the level found in period t? (d). How do your answers in (a) and (b) change if expected inflation is given by T = 0,5Ttt-1? (e) What happens if 20% of workers have their inflation expectations indexed to past = OTtt-1 with 0 = 1 ,where initially actual inflation? (f) Analyze the inflation adjustment if in period t+3, the authority would like to return to the initial inflation of 2%. Okun's law is given by: Ut – Ut-1 = 0,2(gyt – 3%) Note: gyt is the real GDP growth rate in period t.
Answer (a) Before Oil Shock Answer (b) n° = On,-1 where, 0 = 1 T = 7° + 0.08 + 0.1m - 0.5u; therefore, n° = 11-1 where, m = 20% = 0.02 In period (t) T-1 = 2% = 0.02 T, = 4% = 0.04 %3D n = n° + 0.08 + 0.1(0.2) - 0.5u; Aq = 7° + 0.1 - 0.5u (Original Phillips curve from part a) A = n° + 0.1 - 0.5u̟ (Phillips Curve Before Shock) At = TRt-1+ 0.1 - 0.5u¢ u= 7° + 0.1 -7 (Natural rate of unemployment before shock) Putting Values : After Shock 0.04 = 0.02 + 0.1 - 0.5u m = 40% = 0.4 %3D u = 0.08/0.5 = 0.16 At+1 = At+1° + 0.08 + 0.1(0.4) - 0.5u; At+1 = Ht+1° + 0.16 - 0.5uţ+1 (Phillips Curve after shock) Ut+1 = #t+1° - #t+1+0.16 (Natural rate of unemployment after shock After oil shock, m = 0.4 We put this value of (m) into original Phillps curve n = n° + 0.16 - 0.5ug At = At-1 + 0.16 - 0.5u; 0.04 = 0.02 + 0.16 - 0.5ug U = 0.28 Answer (c) Natural rate of unemployment has risen.
Transcribed Image Text:Answer (a) Before Oil Shock Answer (b) n° = On,-1 where, 0 = 1 T = 7° + 0.08 + 0.1m - 0.5u; therefore, n° = 11-1 where, m = 20% = 0.02 In period (t) T-1 = 2% = 0.02 T, = 4% = 0.04 %3D n = n° + 0.08 + 0.1(0.2) - 0.5u; Aq = 7° + 0.1 - 0.5u (Original Phillips curve from part a) A = n° + 0.1 - 0.5u̟ (Phillips Curve Before Shock) At = TRt-1+ 0.1 - 0.5u¢ u= 7° + 0.1 -7 (Natural rate of unemployment before shock) Putting Values : After Shock 0.04 = 0.02 + 0.1 - 0.5u m = 40% = 0.4 %3D u = 0.08/0.5 = 0.16 At+1 = At+1° + 0.08 + 0.1(0.4) - 0.5u; At+1 = Ht+1° + 0.16 - 0.5uţ+1 (Phillips Curve after shock) Ut+1 = #t+1° - #t+1+0.16 (Natural rate of unemployment after shock After oil shock, m = 0.4 We put this value of (m) into original Phillps curve n = n° + 0.16 - 0.5ug At = At-1 + 0.16 - 0.5u; 0.04 = 0.02 + 0.16 - 0.5ug U = 0.28 Answer (c) Natural rate of unemployment has risen.
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