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In: Economics

3. A) Philips curve is represented by the following relationship: π = ?̃ – 10(U –...

A) Philips curve is represented by the following relationship:

π = ?̃ – 10(U – ?̅) + s, where s is a supply shock term, on average equal to zero.

Draw the Phillips curve when ?̅ = 7% and underlying inflation ?̅ = 3% and 6%.

Okun’s Law is

U – ?̅ = -0.5 (Y – ?̅)/?̅.

Draw the aggregate supply schedule when ?̅ = 10,000.

B) Using the conditions of the above exercise, show the impact of supply shocks s = 5%, and s = -2%. Separately show the effect of raising ?̅ to 10,200. Why is it argued that improving the performance of the supply side of the economy is good for both inflation and employment?

TYPED ANSWER

Solutions

Expert Solution

Solution:

(A)

at %

putting value of second equation in first.

if s=5%

at %

if s=5%

at %

(B)

Rahul Sunny answered 1 year ago

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