Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
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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…
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- 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_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_forwardDoes the Phillips curve have a positive or negative slope? Explain how this slope is derived. When will an increase in aggregate demand not result in lower unemployment rates in the short run?arrow_forward
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