10. Suppose that the economy can be described by the following three equations: UtUt-1-0.4(gyt - 3%) TtTt-1-(ut - 5%) Ok

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10 Suppose That The Economy Can Be Described By The Following Three Equations Utut 1 0 4 Gyt 3 Tttt 1 Ut 5 Ok 1 (38.65 KiB) Viewed 20 times

10. Suppose that the economy can be described by the following three equations: UtUt-1-0.4(gyt - 3%) TtTt-1-(ut - 5%) Okun's law Phillips curve Aggregate demand a. Reduce the three equations to two by substituting gyt from the aggregate demand equation into Okun's law. (Okun's law was presented in Chapter 2.) Byt 8mt 1 Ttt - Assume initially that u, ut-1 = 5%, gmt = 13%, and π = 10%. b. Explain why these values are consistent with the statement "Inflation is always and everywhere a monetary phenomenon." Now suppose that money growth is permanently reduced from 13% to 3%, starting in year t. c. Compute (using a calculator or a spread sheet program) unemployment and inflation in years t, t+1,..., t+ 10. Does inflation decline smoothly from 10% to 3%? Why or why not? d. e. Compute the values of the unemployment rate and the inflation rate in the medium run.