Ch22 - 3 1 -OCT—2BBE 31—DCT-2aes 121'? FRDM HKCC (Po...

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Unformatted text preview: 3 1 -OCT—2BBE 31—DCT-2aes 121'? FRDM HKCC (Po lgU) "a'fijw‘. “‘1‘? ‘ 1 “I ' . TD 23643145 'P. 12 CHAPTER 22_ THE SHORT-RUN TRADE-OFF BETWEEN INFLATION AND UNEMPLOYMENT PROBLEMS AND APPLICA'J'IONS 1. Suppose the natural rate of unemployment is 6 percent. On one graph, draw two Phillips curves. that describe the four situations listed. here. Label the point that shows the position of the economy in each case. r - a. Actual inflation is 5 percent and expected inflation is 3 percent. b. Actual inflation is 3 percent and expected inflation is 5 percent. c. Actual inflation is ,5 percent and expected inflation is 5 percent. CI. Actual inflation is 3 percent and. expected inflation is 3 percent. < . Illustrate the effects of the following develop- ments on both the short-run and long—run - Phillips curves. Give the economic reasoning. underlying your answers. a. A rise in the natural rate of unemployment b. A decline in the price of imported oil c. A rise in government Spending v d. A decline in expected inflation 11:49 HKCC (Po lyU) 3. 4. Suppose that the economyis currently at full employment and investment rises. a. Illustrate the immediate change in the economy using both an aggregatesupply/ aggregatedemand diagram and a Phillips- curve diagram. What happens to inflation and unemployment in the short run? ' b. Now suppose that over time expected infla- tion changes in the same direction that actual inflation changes. What happens to the posi- ti0n of the short—run Phillips curve? After the expansion ends, does the economy face a bet- - ter or worse set of inflation-unemployment combinations? ‘ Suppose the economy is in a long-run equilib— rium. _ a. Draw the economy’s short-run and long-run Phillips curves. b. Suppose a wave of business pessimism reduces aggregate demand. Show the effect of this shock on your diagram from part (a). P.12 l q 31-DCT-2886 1218? FROM HKCC (PolgUJ 524 31-UCT-2886 1 1 1 58 PART 8 SHORT-RUN ECONOMIC FLUCTUATIONS If the Fed undertakes expansionary monetary policy, can it return the economy to its origi- nal inflation rate and original unemployment rate? ' c. Now suppose the economy is back in long- run equilibrium, and then the price ‘of imported oil rises. Show the effect of this shock with a new diagram like that in part (a). If the Fed undertakes expansionary mon- etary policy, can it return the economy to its original inflation rate and original unemploy- ment rate? If the Fed undertakes contrac- tionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate? Explain why this situation differs from that inth (b). 5. The inflation rate is 10 percent, and the central bank is considering slowing the rate of money growth to reduce inflation to 5 percent. Econo- mist Milton believes that expectations of infla- tion change quickly in response to new policies, HKCC (PolgU) TD 23643145 P . 13 whereas economist James believes that expecta- tions are very sluggish. Which economist is more likely to favor the proposed change in monetary policy? Whyfl . Suppose the Federal Reserve’s policy is to main- tain low and stable inflation by keeping unem- ployment at its natural rate. H0wever, the Fed believes that the natural rate of unemployment is 4 percent when-the actual natural rate was ,5 percent. If the Fed based iB'policy decisions on its belief, what would happen to the economy? How might the Fed come to realize that its belief about the natural rate was mistaken? ' . Suppose the price of oil falls sharply (as it did in ' 1986 and again in 1998). v a. Show the impact of such a changein both the aggregate-demandAggregate-supply diagram and in the Phillips—curve diagram. What hep pens to inflation and unemployment in the short run? P. 13 31-DCT-2886> 121B? .FRDM HKCC (PolyU) ' TO 23643145 , P.14 I. .V; lame-«wun -.»\ .r .):\a..'.' 5; ... , , m... ‘ I ‘~. \.. CHAPTER 22 THE SHORT-RUN TRADE-OFF BETWEEN‘INFLATION AND UNEMPLOYMENT 525 b. Do the effects of this event mean there is no I inflation? Many. economists believe Vthat' coun- - ' short-run trade-off between inflation and tries can reduce the cost of disinflation by letting '. unemployment? Why or why not? their central banks make decisions about mone- 8. Suppose the Federal Reserve announced that it tar}? P01"? mum“ Interference from Poufidans- would pursue contractionary monetary policy to .WhY might this be 5°? _ reduce the inflation rate. Would the following 10. Suppose Federal Reserve policymakers accept conditions make the ensuing recession more or the theory of the short—run Phillips curve and less severe? Explain. I . the natural-rate hypothesis and want to keep a. .Wage contracts have short durations. unemployment close to-its naturalrate. Unfortu- b. There is little confidence in the Fed’s determi- nately, because the natural rate of unemploy- nalion to reduce inflation. ment can change over time, they aren’t certain c. Expectations of inflation adjust quickly to about the value of the natural rate. What macro- actual inflation. economic variables do you think they should 9. Given the unpopularity of inflation, why don’t 1001‘ at whenmnductms monetarl’ POHCY? elected leaders always support efforts to reduce - \J _ " _ <-\ ' ' ' ' TOTQL P.14 31-DCT-2ZBS 11:58 HKCC (PolyLD 997. P.14 ...
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Ch22 - 3 1 -OCT—2BBE 31—DCT-2aes 121'? FRDM HKCC (Po...

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