Question

In: Economics

Suppose that the Phillips curve is given by:πt-πt-1=m+z-αut. In addition, you are told the following:

Suppose that the Phillips curve is given by:πt-πt-1=m+z-αut. In addition, you are told the following:

If the unemployment rate is 0.07, the inflation rate will rise

If the unemployment rate is 0.10, the inflation rate will fall

Based on this information, we can conclude that the natural rate of unemployment is

A) lower than 0.07

B) equals 0.07

C) between 0.07 and 0.10

D) higher than 0.10

Expert Solution

In the short-run, there exists a trade-off between inflation and unemployment. Any policy meant to decrease unemployment, will most likely increase inflation. This is because the policy will be expansionary in nature.

Conversely, any policy which may raise unemployment, will decrease inflation. This is because the policy will be contractionary in nature.

The natural rate of unemployment will be associated with a stable or non-accelerating, rate of inflation.

Thus, in the given scenario, we can conclude that the natural rate of unemployment is:

---

Correct answer:

C) between 0.07 and 0.10

Between these two values, inflation becomes stable - i.e., it neither rises nor falls. This stable inflation rate will be associated with the natural rate of unemployment

Rahul Sunny answered 2 years ago

5. a. The Phillips curve is πt = πt^e+ (m + z) – αut Rewrite this...

5. a. The Phillips curve is πt = πt^e+ (m + z) – αut Rewrite this relation as a relation between the deviation of the unemployment rate from the natural rate of unemployment (NRU), inflation and expected inflation. b. When we derived the natural rate of unemployment using the wage setting and price setting equations, what condition on the price level and expected price level was imposed in part a? c. How does the NRU vary with the markup? d....

Consider the Phillips curve πt = πt-1 – 0.5(ut – 0.01). What is the natural rate...

Consider the Phillips curve πt = πt-1 – 0.5(ut – 0.01). What is the natural rate of unemployment? Graph the short-run and long-run relationships between inflation and unemployment. How much unemployment is necessary to reduce inflation by 3%? Compute the sacrifice ratio. Do flexible exchange rates permit a country to pick its own unemployment-inflation trade-off target?

Suppose that the Phillips curve is given by: ?? = ?? ? + ? − ???...

Suppose that the Phillips curve is given by: ?? = ?? ? + ? − ??? where ?? is the inflation rate, ?? ? is the expected inflation, ?? is the rate of unemployment and, a and b are two positive parameters. Before the COVID-19 crisis, no wage contract was indexed to the inflation. After the crisis a fraction ? > 0 of wage contracts are indexed to inflation. a. Derive the new equation for the Phillips curve after the...

The Phillips curve, supply shocks, and wage flexibility Suppose that the Phillips curve is given by...

The Phillips curve, supply shocks, and wage flexibility Suppose that the Phillips curve is given by ?? = ?? ? − ?(?? − ?? ) (1) where the natural rate of unemployment, ?? = ?+? ? . [Recall that this Phillips curve was derived under price-setting and wage-setting: ?? = (1 + ?) ?? (2) ?? = ?? ? (1 − ??? + ?) (3) where m is the mark up over marginal cost, which is just the wage rate...

Suppose the economy has the Phillips curve ?? = ??−1 − 0.5(?? − ?? ? ),...

Suppose the economy has the Phillips curve ?? = ??−1 − 0.5(?? − ?? ? ), where the natural rate of unemployment is given by the average of past two years’ unemployment: ?? ? = 0.5(??−1 + ??−2). (i) Why might the natural rate of unemployment depend on recent unemployment (as is assumed in the preceding equation)? [5] (ii) Suppose the Central bank follows a policy to reduce the inflation rate permanently by 1 per centage point. What effect will...

Draw the modern Phillips Curve and assume v of the Phillips Curve is 1. Show and...

Draw the modern Phillips Curve and assume v of the Phillips Curve is 1. Show and explain the effects of the crisis. By exactly how much should inflation change? Be sure to label everything.

INFLATION AND THE PHILLIPS CURVE explain with your own words 1 What is the Phillips curve?...

INFLATION AND THE PHILLIPS CURVE explain with your own words 1 What is the Phillips curve? 2 What is the relationship between inflation and growth?

Suppose r(t)=cos(πt)i+sin(πt)j+2tk represents the position of a particle on a helix, where z is the height...

Suppose r(t)=cos(πt)i+sin(πt)j+2tk represents the position of a particle on a helix, where z is the height of the particle. (a) What is t when the particle has height 8? (b) What is the velocity of the particle when its height is 8? (c) When the particle has height 8, it leaves the helix and moves along the tangent line at the constant velocity found in part (b). Find a vector parametric equation for the position of the particle (in terms...

The arclength of the curve r(t) = 2 cos3 (πt/2), 2 sin3 (πt/2), 1, between the...

The arclength of the curve r(t) = 2 cos3 (πt/2), 2 sin3 (πt/2), 1, between the points r = (2, 0, 1) and r = (0, 2, 1), is given by?

Suppose that there is a fall in oil prices. Use the Phillips curve and/or the AD-AS...

Suppose that there is a fall in oil prices. Use the Phillips curve and/or the AD-AS model to show the short run effects on the economy. State clearly what happens to inflation and unemployment. Why does this pose a challenge for the Fed?