Time Inconsistency of Monetary Policy (All notations are the same as used in the class) Suppose that the Central Bank of Avocado Republic is facing the following Phillips Curve: * = n - 0.4 (u - u,) The Central Bank announces a monetary policy consistent with 1% inflation. The natural rate of unemployment (un) is assumed to be 3%. a. Assume that market participants believe in the Central Bank and form the expected inflation equal to 1% (r = 1%) . If the Central Bank follows through with its announced policy, what are the actual inflation rate and the unemployment rate? %3D ;u = b. Assume that the Central Bank weighs more on unemployment than inflation. So, to achieve an unemployment rate at 1 percentage point below the natural rate, what rate of inflation is the Central Bank willing to accept? To achieve an unemployment rate at u = the Central Bank is willing to accept = Do you think people will still believe in the Central Bank's announced policy? (Yes or No)

Time Inconsistency of Monetary Policy (All notations are the same as used in the class) Suppose that the Central Bank of Avocado Republic is facing the following Phillips Curve: * = n - 0.4 (u - u,) The Central Bank announces a monetary policy consistent with 1% inflation. The natural rate of unemployment (un) is assumed to be 3%. a. Assume that market participants believe in the Central Bank and form the expected inflation equal to 1% (r = 1%) . If the Central Bank follows through with its announced policy, what are the actual inflation rate and the unemployment rate? %3D ;u = b. Assume that the Central Bank weighs more on unemployment than inflation. So, to achieve an unemployment rate at 1 percentage point below the natural rate, what rate of inflation is the Central Bank willing to accept? To achieve an unemployment rate at u = the Central Bank is willing to accept = Do you think people will still believe in the Central Bank's announced policy? (Yes or No)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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If the government uses contractionary monetary policy to reduce inflation from 9 to 6 percent. If people have adaptive expectations, than Inflation rate (%) 12 10 9 8 6 4 0 4 Long run Phillips curve Natural rate 5 E Short run Phillips curve 9 Unemployment rate (%) Unemployment will rise to 8 percent in the short run. The natural rate will permanently increase to 8 percent The economy will remain stuck at point E1. Unemployment will remain at 6 percent as the inflation rate falls.
Solve this economic If the Fed is able to permanently reduce the inflation rate, households will eventually lower their expectation of the inflation rate. Once that happens, the Phillips curve will shift ________, and the Fed can return output to potential GDP by ________ the real interest rate.Select one: a)up; lowering b) up; raising c) down; raising d) down; lowering
Specific subject : Macroeconomics - Phillips Curve & Okun's Law
The main problem of a government constantly using monetary policy to reduce unemployment, as guided bythe Phillips curve is:(a) people eventually update their expectations, shifting the Phillips curve to the right, worsening theinflation-unemployment trade-off(b) people increase their demand for money very fast, rendering monetary policy more difficult(c) eventually hitting the zero lower bound, where monetary policy is not effective anymore(d) being exposed to a negative supply shock(e) none of the above is a problem
Suppose there is a 1% inflation shock, the Phillips curve beta is 2, the output gap is 1% and inflation expectations are 2%. What should be inflation in the long run? can you please show the formulas and steps for this
Part a.: The Phillips curve slopes (downward/upward), since a more positive output gap is associated with a (higher/lower) level of unexpected inflation. The labor market Phillips Curve slopes (downward/upward), since a more positive output gap is associated with a (higher/lower) level of unemployment. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
(a) What events of the 1970s and 1980s made economists believe that the shortrun relationship between inflation and unemployment was unstable (not fixed and permanent)? (b) Explain, using a diagram(s) and the concept of stagflation, the relationship between shifts in the SRAS curve and the position of the short-run Phillips curve.
Figure 17-5 Inflation rate (percent per year) 10% 5 0 Long-run Phillips curve 5.5% 7.5 Short-run Phillips curve Unemployment rate (percent)
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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…
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Suppose an economy with Phillips curve An = 0.5(u 0.06), has a current inflation rate of 10% Propose a mechanism the central bank can use to lower the inflation rate to 5% and determine the new short-run unemployment rate. Graph the Phillips curve, then show and describe: a. how the economy responds to an exogenous jump in prices b. how the Philips curve responds in the long run.