The following graph shows that the Phillips curve (expressing the relation between inflation and unemployment) has flattened over time in the eurozone. Illustrate the flattening of the Phillips curve in the IS-LM-PC graph. What are the implications of the flattening of the Phillips curve for a central bank that i) needs to assess the size of the output gap in order to reduce it and/or ii) aims at bringing inflation in line with target inflation? Explain in words and show graphically. Discuss why the fact that the flattening of the Phillips curve might not be immediately observed by the central bank can be a problem for the conduct of monetary policy. (x-axis: percentages; y-axis: annual percentage changes) 1999-2007 2008-2018 HICPX inflation 3.0 2.5 2.0 1.5 1.0 0.5 0.0 6 9 10 Unemployment rate Sources: Eurostat and ECB calculations. Note: Linear regression lines for the two samples are shown in grey. 11 8 12 13

The following graph shows that the Phillips curve (expressing the relation between inflation and unemployment) has flattened over time in the eurozone. Illustrate the flattening of the Phillips curve in the IS-LM-PC graph. What are the implications of the flattening of the Phillips curve for a central bank that i) needs to assess the size of the output gap in order to reduce it and/or ii) aims at bringing inflation in line with target inflation? Explain in words and show graphically. Discuss why the fact that the flattening of the Phillips curve might not be immediately observed by the central bank can be a problem for the conduct of monetary policy. (x-axis: percentages; y-axis: annual percentage changes) 1999-2007 2008-2018 HICPX inflation 3.0 2.5 2.0 1.5 1.0 0.5 0.0 6 9 10 Unemployment rate Sources: Eurostat and ECB calculations. Note: Linear regression lines for the two samples are shown in grey. 11 8 12 13

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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A. What assumptions did Thomas Sargent make when he claimed that inflation is always and everywhere a fiscal phenomenon?" B. Why is it appropriate in the book's short-term model for the author to use the Phillips Curve as an Aggregate Supply curve? Does it capture the working of the labor market as well as an AS curve based, say, on sticky wages? C. Provide an example of the book's short-run model being based on "microfoundations."
Suppose that the central bank has the policy "set R equal to 3 if inflation equals 2% and GAP = 0. Raise R by 0.5 points for every point of inflation above 2%. Reduce R by 0.5 points for every point that inflation falls shortof 2%. Increase R by 1 point for every percentage point of GAP, if GAP > 0. Reduce R by 1 point for every percentage point of GAP, if GAP < 0." All but one of the following is an equation that is consistent with this rule. Which is the exception? OR-3+0.5( - 2) + GAP OF-2+1.5n + GAP OF- 3+0.5(n - 2) + GAP + n R-2+n+ GAP
MA4. 13. If the equation for a country's Phillips curve is π = 0.05 – 0.8(u – 0.05), where π is the rate of inflation and u is the unemployment rate, what is the short-run inflation rate when unemployment is 3 percent (0.03)? A) .066 B) -.056 C) -.066 D) .056 11. The aggregate supply equation is Y = Y + α(P – EP). Assume that Y is 2,000, α = 200, P = 1.12 and EP = 1.00. What is the value of Y? A) 2,232 B) 2,024 C) 2,400 D) 2,012 9. If policymakers announce in advance how policy will respond to various situations but then renege on their announcements, this a problem of: A) policy by rule. B) policy by discretion. C) time inconsistency of policy. D) monetary policy. 10. According to the sticky-price model, output will be above the natural level if: A) firms expect a high price level and the demand for goods is high. B) the proportion of firms with flexible prices equals the proportion of firms with sticky prices. C) the price level is above the…
what are the policy implications of assuming different inflation expectations
Inflationary expectations are an important driver of the Phillips curve relationship. What are three different ways inflationary expectations might be modelled? Depict each graphically.
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Question 3: The Phillips Curve and Inflation Expectations Consider the following two modifications to the Phillips Curve equation we studied in class The Federal Reserve has been successful in achieving stable inflation around its target rate of 2% per year. Therefore, we may expect inflation expectations to be "anchored" in the sense that private sector agents expect inflation to eventually return to target over the long-run after any economic shocks. Suppose that inflation expectations are not adaptive, but are anchored to the inflation target as follows: π = (1-р)π + pπt-1 This equation says that firms forecast inflation as a weighted average of the inflation target and yesterday's inflation Tt-1. Note that adaptive expectations are a special case of this where the weight on yesterday's inflation p = 1. i. ii. Many economists have documented that the empirical Phillips Curve is almost flat. Therefore, suppose that the Phillips Curve does not depend on the current state of the…
Let's say that at some time in the past the central bank of a nation raised real interest rates to get inflation under control. Inflation has stayed low now for a couple of years. As people in the economy build this now-lower inflation into their expectations, the economy will move further away from the LR value of output we'll move to the right along the same Phillips Curve the Fed will shift the MP curve further upward the Phillips curve will shift rightward
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Question 9 Using the Fed model linking the IS-MP framework with the Phillips curve, draw a graph that illustrates the following scenario: Expected inflation is 1.5%. The economy is initially in macroeconomic equilibrium with a real interest rate of 3%, an output gap of -1%, and an actual inflation rate of 1%. Upload Choose a File