Suppose that in a given country, the line of best fit approximates the Phillips curve shown here. Suppose for next year, you expect GDP to be 3% below potential GDP. Current inflation expectations are at 2%. How much does your salary have to change, in nominal terms, in order to maintain your purchasing power? Unexpected inflation O O 3% -1% 2% 1% 1% 4% 0% -3% 0 Phillips curve 3% Output gap

Suppose that in a given country, the line of best fit approximates the Phillips curve shown here. Suppose for next year, you expect GDP to be 3% below potential GDP. Current inflation expectations are at 2%. How much does your salary have to change, in nominal terms, in order to maintain your purchasing power? Unexpected inflation O O 3% -1% 2% 1% 1% 4% 0% -3% 0 Phillips curve 3% Output gap

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

O Macmillan Learning
Suppose that in a given country, the line of best fit approximates the Phillips curve shown here. Suppose for next year, you
expect GDP to be 3% below potential GDP. Current inflation expectations are at 2%. How much does your salary have to
change, in nominal terms, in order to maintain your purchasing power?
Unexpected
inflation
1%
3%
2%
1%
4%
0%
-1%
-3%
Phillips
curve
3%
Output gap

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You are given the following information about the economy: the nominal interest rate = 8 percent; the real rate of interest = 6 percent. The inflation premium is Multiple Choice O 2 percent. O 8 percent. 6 percent. O O 14 percent. MacBook Pro % 95 74 Q $ #3 M 66 E R T & 27 Y * 8 U A ll 61 0
D Question 1 The short-run Phillips curve is a curve that shows the relationship, other things being constant, between and O the inflation rate; the unemployment rate O the inflation rate; the nominal interest rate O the unemployment rate; real GDP 0.1 pts O potential GDP; the natural unemployment rate O the inflation rate; the expected inflation rate .
9
Suppose the Phillips curve is given by the following: 2ut It Where: π = Tt-1 Suppose πt-1 = 0; at year t, authorities decide to keep unemployment rate at 4% forever. a. Compute the rate of inflation for years t+1, t+2 and t+3. b. Suppose half of labor contract of workers has been indexed. What is the new equation for the Phillips curve? Compute the rate of inflation for years t+1, t+2 and t+3. i. π = 0.1 ii. iii. Compared to your answers in problem (a), what can you conclude?
2. The inflation-unemployment relationship The following graph shows the combinations of unemployment and inflation that existed in the United States for selected years between 1961 and 1969. Click on any blue point (circle symbol) on the graph to get its exact coordinates. You can also use the black point (cross symbol) to find the coordinates of other points along the curve. (Note: You will not be graded for any adjustments made to the graph.) INFLATION RATE (Percent) 1969 5.2 4.5 1988 85 1967 20 1.5 10 0.5 1960 1984 1963 1981 0 2.0 3.5 40 4.5 5.0 5.5 GO 4.5 7.0 UNEMPLOYMENT RATE (Percent)
Rate Inflation 7 6 5 4 N 1 0 -1 -2 -3 0 De graph below depicts a short-run Phillips Curve. Move the line as needed to depict a long-run Phillips curve, then answer the question to the right. O 1 2 3 4 5 6 7 Unemployment Rate 8 9 10 The relationship between inflation and unemployment in the short run is different from their relationship in the long run. Which of the following is an important factor in that difference? Inflation Expectations Tax Rates Price Levels Okun's Law
For this question, assume that the expected rate of inflation is a function of past year's inflation. Also assume that the unemployment rate has been greater than the natural rate of unemployment for a number of years. Given this information, we know that the inflation rate will be approximately equal to the natural rate of unemployment. А. the rate of inflation will approximately be equal to zero. В. C. the rate of inflation should steadily decrease. Op the rate of inflation should steadily increase over time. the rate of inflation should neither increase nor decrease. Е.
If the input cost adjustment process works very slowly so that actual output differs from potential output for a long period of time, then None of the answers is correct O b. Active stabilization policies are probably not justified O c. Active stabilization policies are likely to create hyper-inflation O d. Active stabilization policy may widen the output gap even further
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