5. An economy has a Phillips curve takes the form of p = 0.04 - 0.5(u...

5. An economy has a Phillips curve takes the form of p = 0.04 - 0.5(u - 0.03) where is the actual inflation rate and u is the unemployment rate.

What is the short-run relationship between inflation and unemployment according to the Phillip curve function above? (1)

Explain demand pull inflation using the expression of Phillips curve above. (2)

Illustrate cost push inflation using the expression of Phillips curve above. (2)

Expert Solution

Rahul Sunny answered 2 years ago

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...

b) Explain why the Phillips curve relationship in the basic New Keynesian model takes the form...

b) Explain why the Phillips curve relationship in the basic New Keynesian model takes the form it does.

Consider the Phillips curve: pi(t) = Epi(t) - 0.5(u(t) - 8), where pi(t) is inflation rate...

Consider the Phillips curve: pi(t) = Epi(t) - 0.5(u(t) - 8), where pi(t) is inflation rate at t, Epi(t) is expected inflation for t, and u(t) is unemployment at t. Now suppose the public has adaptive expectation: Epi(t) = pi(t-1), Epi(t+1) = pi(t), and so on. Inflation at time t-1 is pi(t-1) = 3%; the rate of unemployment u(t) at time t is at the natural level. The authorities decide to bring the unemployment rate to 6% from time t+1...

a. Consider an economy that is characterised by the following Phillips curve: ? = ?- −...

a. Consider an economy that is characterised by the following Phillips curve: ? = ?- − ?(? − ?e ), where ? is unemployment, ?- is the natural rate of unemployment, ? is inflation, ?e is inflation expectations and ? > 0 is a parameter. Suppose that the loss function of the central bank is given by: ?(?, ?) = ? + 3/2 ?2 Agents are assumed to be rational. Compute inflation and unemployment (i) if the central bank commits...

Suppose demand takes the form P = 10 – 2Q and supply takes the form P...

Suppose demand takes the form P = 10 – 2Q and supply takes the form P = 2 + 2Q. Find the market equilibrium (2) How much total revenue (i.e. P*Q) will the firm receive at this equilibrium? (2) Suppose the government decides to impose a price floor on dairy products to prevent dairy farms from closing down. If the market for a case of milk takes the form of: Demand: P = 100 – 10Q Supply: P = 10Q...

Monopoly The market demand curve for doodads takes the form QD = (80 – P)/7. a)...

Monopoly The market demand curve for doodads takes the form QD = (80 – P)/7. a) Start a Table with doodad quantity ranging from 1 to 10, with the corresponding price in each case. Graph the demand curve. b) Calculate and add total revenue and marginal revenue, and add the marginal revenue curve to your graph. c) Is there any way that the monopolist can maximize profit by producing 7 doodads? Explain. d) Assume that there are no diminishing returns...

If a Phillips curve shows that unemployment is high and inflation is low in the economy,...

If a Phillips curve shows that unemployment is high and inflation is low in the economy, then that economy: a) is producing at a point where output is less than potential GDP. B) is producing at its potential GDP. C) is producing at a point where output is more than potential GDP. D) is producing at its equilibrium point. Question 21 pts A fiscal policy that increases government spending or cuts taxes is most appropriate when the economy is in:...

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?

3. Consider the Phillips curve: Π = EΠ - B(u - un) + v Π...

3. Consider the Phillips curve: Π = EΠ - B(u - un) + v Π = inflation EΠ =expected inflation v=supply shock u=unemployment rate uN=natural unemployment rate Explain the effect on the Phillips curve and the Phillips curve tradeoff due to the Covid 19 virus.

The following graph shows the current short-run Phillips curve for a hypothetical economy

5. Monetary policy and the Phillips curve The following graph shows the current short-run Phillips curve for a hypothetical economy; the point on the graph shows the initial unemployment rate and inflation rate. Assume that the economy is currently in long-run equilibrium. Suppose the central bank of the hypothetical economy decides to decrease the money supply. On the following graph, shift the curve or drag the blue point along the curve, or do both, to show the short-run effects of this policy. In the...

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