MACROECONOMICS+ACHIEVE 1-TERM AC (LL)
10th Edition
ISBN: 9781319467203
Author: Mankiw
Publisher: MAC HIGHER
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Question
Chapter 14, Problem 7PA
(a)
To determine
The dependency of natural rate of
(b)
To determine
The impact of permanent reduction in inflation by 1 percentage point on unemployment.
(c)
To determine
The sacrifice ratio of the economy.
(d)
To determine
The short-run and long-run trade off.
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You observe the following short-run Phillips curve for the economy:
T = 9.2 -0.26(u - 6.5%) + v.
There are no supply shocks to the economy, and the actual unemployment rate is 6.5% (and will stay
that way for the foreseeable future).
What will expected inflation be next year? Write your answer as a percentage, and round at one (1)
decimal. Do not write the percentage sign. If you need more information to answer the question, write
"O".
An economy has the following equation for the Phillips Curve:
π = Eπ − 0.5(u − 6)People form expectations of inflation by taking a weighted average of the previous two years of inflation:
Okun’s law for this economy is:
Eπ = 0.7π−1 + 0.3π−2
(Y −Y−1)/(Y-1)=3.0−2.0(u−u−1)
Th economy begins at its natural rate of unemployment with a stable inflation rate of 5 percent.
1. What is the natural rate of unemployment for this economy?
2. Graph the short-run tradeoff between inflation and unemployment that this economy faces. Label the point where the economy begins as A.
3. A fall in aggregate demand leads to a recession, causing the unemployment rate to rise 4 percentage points above its natural rate. On your graph, label the point the economy experiences that year as point B.
1. An economy has the following equation for the Phillips Curve:
π = Eπ − 0.5(u − 6)People form expectations of inflation by taking a weighted average of the previous two years of inflation:
Okun’s law for this economy is:
Eπ = 0.7π−1 + 0.3π−2
(Y −Y−1)/(Y-1)=3.0−2.0(u−u−1)
Th economy begins at its natural rate of unemployment with a stable inflation rate of 5 percent.
Graph the short-run tradeoff between inflation and unemployment that this economy faces. Label the point where the economy begins as A. (Be sure to give numerical values for point A.)
A fall in aggregate demand leads to a recession, causing the unemployment rate to rise 4 percentage points above its natural rate. On your graph in part (b), label the point the economy experiences that year as point B.(Be sure to give numerical values.)
Unemployment remains at this high level for two years (the initial year described in part (c) and one more), after which it returns to its natural rate. Create a table showing…
Chapter 14 Solutions
MACROECONOMICS+ACHIEVE 1-TERM AC (LL)
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- Assume that expected inflation is based on the following: πet = θπt-1. If θ = 1, we know that A) a reduction in the unemployment rate will have no effect on inflation. B) low rates of unemployment will cause steadily increasing rates of inflation. C) the actual unemployment rate will not deviate from the natural rate of unemployment. D) the Phillips curve illustrates the relationship between the level of inflation rate and the level of the unemployment rate.arrow_forwardAccording to the St. Louis Federal Reserve the natural unemployment rate is 4.42 percent (Q4 2023 ) and the U.S. Bureau of Labor Statistics (BLS) estimates the U.S. unemployment rate (U3, October 2023 B) to be 3.9 percent. If you expect unemployment to continue to fall the short-run Phillips curve would predict: OA decrease in the inflation rate. An increase in the inflation rate. ○ A decrease in the unemployment rate. ○ An increase in the unemployment rate.arrow_forwardFor this question, assume that the Phillips curve equation is represented by the following equation: πt - πt-1 = (m + z) - αut. A reduction in the unemployment rate will cause A) a reduction in the markup over labor costs (i.e., a reduction in m). B) an increase in the markup over labor costs. C) an increase in the inflation rate over time. D) a decrease in the inflation rate over time. E) none of the abovearrow_forward
- Consider the US Phillips Curve for the US economy: 1 = n° – a(u – ua), where a = 0.3. a) If the Fed commits to having zero inflation and the public believes it, how much inflation will result from decreasing the unemployment rate by 1 percentage point below the natural rate of unemployment. b) The public stops believing the Fed and now assume expected inflation to be that of question a). How much inflation will result if the Fed tries to again to decrease the unemployment rate by 1 percentage point below the natural rate of unemployment. c) Now assume that the Fed is not going to try to intervene in the unemployment rate anymore, allowing it back to its natural rate. What would the inflation rate be if the public expect the inflation from b)? What would the inflation be in the next periods? Explain d) Explain the problem that the FED faces when the public stops believing that the target inflation will be met.arrow_forwardConsider the expectations adjusted Phillips’s curve and assume that expected inflation is given by πet = πt-1. Suppose that unemployment is initially equal to the natural rate and that π=10%. The central bank decides that inflation is too high and that, starting in year t, it will maintain the unemployment rate 1% point above the natural rate until the inflation rate has decreased to 2%. (a) What is the sacrifice ratio in this economy [Hint: the sacrifice ratio is the percentage of a year’s excess unemployment needed to reduce inflation by 1%. For a Philips curve given as πet − πt −1 = −α (ut − un ), the sacrifice ratio is 1/α]? (b) Compute the rate of inflation for year t, t+1, t+2, t+3, …, t+8. (c) For how many years must the central bank keep the unemployment rate above the natural rate of unemployment? Is the implied sacrifice ratio consistent with your answer to (a)?arrow_forwardAssume that an economy is governed by the Phillips curve π= πe – 0.5(u – 0.06), where π= (P – P–1)/P–1, π e = (P e – P–1)/P–1, and 0.06 is the natural rate of unemployment. Further assume π e = π–1. Suppose that, in period zero, π= 0.03 and πe = 0.03—that is, that the economy is experiencing steady inflation at a 3-percent rate. a. Now assume that the government decides to impose whatever demand is necessary to cut unemployment to 0.04. Suppose the government follows this policy for periods 1 through 5. Create a table of π and πe for these five periods. b. Assume that, for periods 6 through 10, the government decides to hold unemployment at 0.06. Create another table of π and πe for these five periods. Is there any reason to expect the inflation rate to go back to 0.03? c. If the government persisted in its behavior under part a, do you think the public would continue for long forming expectations according to πe = π–1? Why?arrow_forward
- Suppose the Federal Reserve sets the real interest rate to 1.5%. Moreover, assume that there are no demand shocks, that b = 2.5, and that F = 0.02. If the resulting change in the inflation rate is +0.375 percentage points, what is the value of the parameter D? (Round to the nearest hundredth.) Hint: Use the IS and Phillips Curves to calculate your answer.arrow_forward1. Problems and Applications Q1 Consider the following four situations: A. Actual inflation is 6 percent, and expected inflation is 6 percent. B. Actual inflation is 4 percent, and expected inflation is 6 percent. C. Actual inflation is 4 percent, and expected inflation is 4 percent. D. Actual inflation is 6 percent, and expected inflation is 4 percent.arrow_forwardIf the Phillips curve in an economy is given by π = π-1-0.5(u-0.02), then it takes 6 percentage points of cyclical unemployment to reduce inflation by 3 percentage points requires 3 percentage points of cyclical unemployment to reduce the rate of inflation by 6 percentage points the natural rate of unemployment is 3% the natural rate of unemployment is 5% the natural rate of unemployment is 6%arrow_forward
- With the image attached, what does the Phillips Curve Represent.arrow_forward(Problem 3, Page 477) In a certain economy the expectations-augmented Phillips curve is π = π² − 2 (u – ū) and ū= 0.06. a. Graph the Phillips curve of this economy for an expected inflation rate of 0.10. If the Fed chooses to keep the actual inflation rate at 0.10, what will be the unemployment rate? b. An aggregate demand shock (resulting from increased military spending) raises expected inflation to 0.12 (the natural unemployment rate is unaffected). Graph the new Phillips curve and compare it to the curve you drew in Part (a). What happens to the unemployment rate if the Fed holds actual inflation at 0.10? What happens to the Phillips curve and the unemployment rate if the Fed announces that it will hold inflation at 0.10 after the aggregate demand shock, and this announcement is fully believed by the public? c. Suppose that a supply shock (a drought) raises expected inflation to 0.12 and raises the natural unemployment rate to 0.08. Repeat Part (b).arrow_forwardIn a certain economy, the expectations-augmented Phillips curve is π = T²2(u - u) and u=0.06. a. Graph the Phillips curve of this economy for an expected inflation rate of 0.10. If the central bank chooses to keep the actual inflation rate at 0.10, what will be the unemployment rate?arrow_forward
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