- Suppose That The Phillips Curve Is Given By 1 (206.17 KiB) Viewed 16 times
Suppose that the Phillips curve is given by
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Suppose that the Phillips curve is given by
Suppose that the Phillips curve is given by
Suppose that the Phillips curve is given by πt = π +0.1 - 2ut a. [3 points] What is the natural rate of unemployment? Assume πρ = θπι1 and suppose that u is initially equal to 0. Suppose that the rate of unemployment is initially equal to the natural rate. In year t, the authorities decide to bring the unemployment rate down to 3% and hold it there forever. b. [3 points] Determine the rate of inflation in years t, t + 1, t + 2, and t + 5. c. [3 points] Do you believe the answer given in (b)? Why or why not? (Hint: Think about how people are likely to form expectations of inflation.) Now suppose that in year t + 5,0 increases from 0 to 1. Suppose that the government is still determined to keep u at 3% forever. d. [3 points] Why might increase in this way? e. [3 points] What will the inflation rate be in years t + 5, t + 6, and t+7? f. [3 points] Do you believe the answer given in (e)? Why or why not? Suppose that inflation in year t - 1 is zero and 0 = 1. In year t, the authorities decide to keep the unemployment rate at 4% forever. g. [3 points] Compute the rate of inflation for years t, t + 1, t + 2, and t + 3. Now suppose that half the workers have indexed labor contracts. h. i. j. [3 points] What is the new equation for the Phillips curve? [3 points] Based on your answer to part (h), recompute your answer to part (g). [3 points] What is the effect of wage indexation on the relation between p and u?
Suppose that the Phillips curve is given by πt = π +0.1 - 2ut a. [3 points] What is the natural rate of unemployment? Assume πρ = θπι1 and suppose that u is initially equal to 0. Suppose that the rate of unemployment is initially equal to the natural rate. In year t, the authorities decide to bring the unemployment rate down to 3% and hold it there forever. b. [3 points] Determine the rate of inflation in years t, t + 1, t + 2, and t + 5. c. [3 points] Do you believe the answer given in (b)? Why or why not? (Hint: Think about how people are likely to form expectations of inflation.) Now suppose that in year t + 5,0 increases from 0 to 1. Suppose that the government is still determined to keep u at 3% forever. d. [3 points] Why might increase in this way? e. [3 points] What will the inflation rate be in years t + 5, t + 6, and t+7? f. [3 points] Do you believe the answer given in (e)? Why or why not? Suppose that inflation in year t - 1 is zero and 0 = 1. In year t, the authorities decide to keep the unemployment rate at 4% forever. g. [3 points] Compute the rate of inflation for years t, t + 1, t + 2, and t + 3. Now suppose that half the workers have indexed labor contracts. h. i. j. [3 points] What is the new equation for the Phillips curve? [3 points] Based on your answer to part (h), recompute your answer to part (g). [3 points] What is the effect of wage indexation on the relation between p and u?