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).
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
100%
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.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F4286a02c-a52a-4152-b72b-501e0e0f24b2%2Fd000fbda-54d2-48b8-90df-741affaab361%2Fsfhq52j_processed.png&w=3840&q=75)
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.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F4286a02c-a52a-4152-b72b-501e0e0f24b2%2Fd000fbda-54d2-48b8-90df-741affaab361%2F1wgm9n3_processed.png&w=3840&q=75)
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.
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 1 images
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
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](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9780190931919/9780190931919_smallCoverImage.gif)
![Principles of Economics (12th Edition)](https://www.bartleby.com/isbn_cover_images/9780134078779/9780134078779_smallCoverImage.gif)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
![Engineering Economy (17th Edition)](https://www.bartleby.com/isbn_cover_images/9780134870069/9780134870069_smallCoverImage.gif)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
![ENGR.ECONOMIC ANALYSIS](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9780190931919/9780190931919_smallCoverImage.gif)
![Principles of Economics (12th Edition)](https://www.bartleby.com/isbn_cover_images/9780134078779/9780134078779_smallCoverImage.gif)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
![Engineering Economy (17th Edition)](https://www.bartleby.com/isbn_cover_images/9780134870069/9780134870069_smallCoverImage.gif)
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)](https://www.bartleby.com/isbn_cover_images/9781305585126/9781305585126_smallCoverImage.gif)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
![Managerial Economics: A Problem Solving Approach](https://www.bartleby.com/isbn_cover_images/9781337106665/9781337106665_smallCoverImage.gif)
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-…](https://www.bartleby.com/isbn_cover_images/9781259290619/9781259290619_smallCoverImage.gif)
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education