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ps12 - 6 Suppose the central bank tries to maintain an...

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ECON 205: PRINCIPLES OF MACROECONOMICS FALL 2008 MARK MOORE PROBLEM SET 12 1. Explain how fluctuations in the AD curve generate a Phillips curve. 2. Explain how adverse supply shocks, e.g., increases in the price of oil, affect the Phillips curve. 3. Explain how increases in expected inflation affect the Phillips curve. 4. Why did the Phillips curve seem to disappear in the 1970s? 5. Suppose the unemployment rate is below the natural rate. Using the Phillips curve, explain how the economy returns to the natural rate of unemployment.
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Unformatted text preview: 6. Suppose the central bank tries to maintain an unemployment rate below the natural rate. What are the implications for inflation? 7. “Ben Bernanke (the Fed Chair) has the easiest job in the world. All he has to do is reduce the interest rate when the unemployment rate rises and increase the interest rate when the unemployment rate falls.” Evaluate this statement. 8. What is required to reduce inflation? How does your answer change if the economy is characterized by rational expectations?...
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