1. Which of the following statements regarding inflation and deflation is correct (a warm-up question)? a. Borrowers ben
Posted: Mon May 02, 2022 7:55 am
1. Which of the following statements regarding inflation and
deflation is correct (a warm-up question)?
a. Borrowers benefit from deflation, as the value of their debt
decreases in real terms.
b. Inflation transfers wealth from lenders to borrowers.
c. Falling prices benefit consumers and are therefore always
good for the economy.
d. Inflation makes it difficult for consumers and firms to
attain the message about the scarcity of resources (sent by
relative prices) and is therefore always bad for the economy.
2. Answer the following questions:
a. Illustrate the Phillips curve by using a graph where
unemployment is on the horizontal axis and inflation is on the
vertical axis. Redraw the Phillips curve where employment is on the
horizontal axis and inflation is on the vertical axis and the
economy is in a labor market equilibrium with stable prices. What
is the difference between these two graphs?
Now consider two scenarios:
i. A negative shock to aggregate demand (e.g. a decrease in
export) that increases the unemployment rate by 3 percentage
points.
ii. A positive shock to aggregate demand (e.g. an increase in
government expenditure) that decreases the unemployment by 3
percentage points.
b. What happens to the bargaining gap in each case?
c. What would you expect to happen to the price level in each
case?
Explain your answers by using both the Philips curve (employment
on the horizontal axis and inflation on the vertical axis) and the
AD curve.
3. Consider the Philips curve as follows:
πππ‘π‘ = ππππ π‘π‘ β πΌπΌ(π’π’π‘π‘ β π’π’ππ)
Where πππ‘π‘ is the inflation rate, ππππ π‘π‘ is expected inflation,
π’π’π‘π‘ is the actual unemployment rate and π’π’ππ is the natural rate
of unemployment.
a. Explain the intuition behind the equation.
b. Letβs assume there is an increase in the price of oil (a
negative supply shock). Explain the mechanism linking the oil shock
to inflation using the Philips curve equation and diagram.
c. Letβs assume the natural rate of unemployment in Australia is
5%, the actual rate of unemployment in 2022 is 4%, πΌπΌ = 0.32, and
the inflation rate in 2021 was 3%. By using the Phillips curve
equation (mentioned above) what would be the estimation of the
inflation rate in 2022? Explain your answer.
Explain please point by point
deflation is correct (a warm-up question)?
a. Borrowers benefit from deflation, as the value of their debt
decreases in real terms.
b. Inflation transfers wealth from lenders to borrowers.
c. Falling prices benefit consumers and are therefore always
good for the economy.
d. Inflation makes it difficult for consumers and firms to
attain the message about the scarcity of resources (sent by
relative prices) and is therefore always bad for the economy.
2. Answer the following questions:
a. Illustrate the Phillips curve by using a graph where
unemployment is on the horizontal axis and inflation is on the
vertical axis. Redraw the Phillips curve where employment is on the
horizontal axis and inflation is on the vertical axis and the
economy is in a labor market equilibrium with stable prices. What
is the difference between these two graphs?
Now consider two scenarios:
i. A negative shock to aggregate demand (e.g. a decrease in
export) that increases the unemployment rate by 3 percentage
points.
ii. A positive shock to aggregate demand (e.g. an increase in
government expenditure) that decreases the unemployment by 3
percentage points.
b. What happens to the bargaining gap in each case?
c. What would you expect to happen to the price level in each
case?
Explain your answers by using both the Philips curve (employment
on the horizontal axis and inflation on the vertical axis) and the
AD curve.
3. Consider the Philips curve as follows:
πππ‘π‘ = ππππ π‘π‘ β πΌπΌ(π’π’π‘π‘ β π’π’ππ)
Where πππ‘π‘ is the inflation rate, ππππ π‘π‘ is expected inflation,
π’π’π‘π‘ is the actual unemployment rate and π’π’ππ is the natural rate
of unemployment.
a. Explain the intuition behind the equation.
b. Letβs assume there is an increase in the price of oil (a
negative supply shock). Explain the mechanism linking the oil shock
to inflation using the Philips curve equation and diagram.
c. Letβs assume the natural rate of unemployment in Australia is
5%, the actual rate of unemployment in 2022 is 4%, πΌπΌ = 0.32, and
the inflation rate in 2021 was 3%. By using the Phillips curve
equation (mentioned above) what would be the estimation of the
inflation rate in 2022? Explain your answer.
Explain please point by point