4. Graphically illustrate (using the WS and PS relations), and explain in words, the effects of...

4. Graphically illustrate (using the WS and PS relations), and explain in words, the effects of an

increase in the unemployment benefits on the medium-run equilibrium real wage and the

natural rate of unemployment.

6. We have looked at the following model of expected inflation: πte = (1-Ѳ)πbar + Ѳπt-1
a. Describe the process of the formation of expected inflation when Ѳ = 0.
b. Describe the process of the formation of expected inflation when Ѳ = 1.
c. How do you form your own expectation of inflation? More like a. or more like b.?

Solutions

Expert Solution

4:-

6:-

A. When theta=0, the expected inflation is similar as previous year inflation which therefore indicates zero rise in prices from last year.

B. When theta = 1, the expected inflation will include additional inflation of last year as well.

C. Generally we form the inflation expectation on the basis of theta = 1

Rahul Sunny answered 1 year ago

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